Correlation Between AAR Corp and Embraer SA

Can any of the company-specific risk be diversified away by investing in both AAR Corp and Embraer SA 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 AAR Corp and Embraer SA into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between AAR Corp and Embraer SA ADR, you can compare the effects of market volatilities on AAR Corp and Embraer SA 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 AAR Corp with a short position of Embraer SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of AAR Corp and Embraer SA.

Diversification Opportunities for AAR Corp and Embraer SA

0.64

Correlation Coefficient

AAR Corp  Embraer SA

Poor diversification

The 3 months correlation between AAR and Embraer is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding AAR Corp and Embraer SA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Embraer SA ADR and AAR Corp 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 AAR Corp are associated (or correlated) with Embraer SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Embraer SA ADR has no effect on the direction of AAR Corp i.e., AAR Corp and Embraer SA go up and down completely randomly.

Pair Corralation between AAR Corp and Embraer SA

Considering the 90-day investment horizon AAR Corp is expected to generate 2.23 times less return on investment than Embraer SA. But when comparing it to its historical volatility, AAR Corp is 1.15 times less risky than Embraer SA. It trades about 0.05 of its potential returns per unit of risk. Embraer SA ADR is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,281  in Embraer SA ADR on August 31, 2024 and sell it today you would earn a total of  539.00  from holding Embraer SA ADR or generate 16.43% return on investment over 90 days.

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

AAR Corp  vs.  Embraer SA ADR

AAR Corp

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in AAR Corp are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal forward indicators, AAR Corp may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Embraer SA ADR

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Embraer SA revealed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with AAR Corp and Embraer SA

The main advantage of trading using opposite AAR Corp and Embraer SA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if AAR Corp position performs unexpectedly, Embraer SA 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 Embraer SA will offset losses from the drop in Embraer SA's long position.

The idea behind AAR Corp and Embraer SA ADR 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..