Correlation Between BAE Systems and AAR Corp

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

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

Diversification Opportunities for BAE Systems and AAR Corp

0.1

Correlation Coefficient

BAE Systems  AAR Corp

Average diversification

The 3 months correlation between BAE and AAR is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and AAR Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AAR Corp and BAE Systems 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 BAE Systems PLC are associated (or correlated) with AAR Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AAR Corp has no effect on the direction of BAE Systems i.e., BAE Systems and AAR Corp go up and down completely randomly.

Pair Corralation between BAE Systems and AAR Corp

Assuming the 90 days horizon BAE Systems PLC is expected to under-perform the AAR Corp. But the pink sheet apears to be less risky and, when comparing its historical volatility, BAE Systems PLC is 1.28 times less risky than AAR Corp. The pink sheet trades about -0.07 of its potential returns per unit of risk. The AAR Corp is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  6,488  in AAR Corp on September 3, 2024 and sell it today you would earn a total of  464.00  from holding AAR Corp or generate 7.15% return on investment over 90 days.

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

BAE Systems PLC  vs.  AAR Corp

BAE Systems PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

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 unfluctuating forward indicators, AAR Corp may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BAE Systems and AAR Corp

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

The idea behind BAE Systems PLC and AAR Corp 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.