Correlation Between Illinois Tool and Freeport McMoran

Can any of the company-specific risk be diversified away by investing in both Illinois Tool and Freeport McMoran at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Illinois Tool and Freeport McMoran into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Illinois Tool Works and Freeport McMoran Copper Gold, you can compare the effects of market volatilities on Illinois Tool and Freeport McMoran and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Illinois Tool with a short position of Freeport McMoran. Check out your portfolio center. Please also check ongoing floating volatility patterns of Illinois Tool and Freeport McMoran.

Diversification Opportunities for Illinois Tool and Freeport McMoran

0.2

Correlation Coefficient

Illinois Tool  Freeport McMoran

Modest diversification

The 3 months correlation between Illinois and Freeport is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Illinois Tool Works and Freeport McMoran Copper Gold in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Freeport McMoran Copper and Illinois Tool is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Illinois Tool Works are associated (or correlated) with Freeport McMoran. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Freeport McMoran Copper has no effect on the direction of Illinois Tool i.e., Illinois Tool and Freeport McMoran go up and down completely randomly.

Pair Corralation between Illinois Tool and Freeport McMoran

Considering the 90-day investment horizon Illinois Tool is expected to generate 1.52 times less return on investment than Freeport McMoran. But when comparing it to its historical volatility, Illinois Tool Works is 1.99 times less risky than Freeport McMoran. It trades about 0.04 of its potential returns per unit of risk. Freeport McMoran Copper Gold is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  4,000  in Freeport McMoran Copper Gold on January 24, 2024 and sell it today you would earn a total of  895.00  from holding Freeport McMoran Copper Gold or generate 22.38% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Illinois Tool Works  vs.  Freeport McMoran Copper Gold

Illinois Tool Works

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Illinois Tool Works has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Illinois Tool is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Freeport McMoran Copper

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Freeport McMoran Copper Gold are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, Freeport McMoran showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Illinois Tool and Freeport McMoran

The main advantage of trading using opposite Illinois Tool and Freeport McMoran positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Illinois Tool position performs unexpectedly, Freeport McMoran can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Freeport McMoran will offset losses from the drop in Freeport McMoran's long position.

The idea behind Illinois Tool Works and Freeport McMoran Copper Gold pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Volatility Analysis module to get historical volatility and risk analysis based on latest market data.