Correlation Between CAE and Embraer SA

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

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

Diversification Opportunities for CAE and Embraer SA

0.78

Correlation Coefficient

CAE  Embraer SA

Poor diversification

The 3 months correlation between CAE and Embraer is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding CAE Inc 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 CAE 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 CAE Inc 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 CAE i.e., CAE and Embraer SA go up and down completely randomly.

Pair Corralation between CAE and Embraer SA

Considering the 90-day investment horizon CAE Inc is expected to generate 0.81 times more return on investment than Embraer SA. However, CAE Inc is 1.23 times less risky than Embraer SA. It trades about 0.22 of its potential returns per unit of risk. Embraer SA ADR is currently generating about 0.11 per unit of risk. If you would invest  1,768  in CAE Inc on August 31, 2024 and sell it today you would earn a total of  565.00  from holding CAE Inc or generate 31.96% return on investment over 90 days.

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

CAE Inc  vs.  Embraer SA ADR

CAE Inc

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CAE Inc are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, CAE exhibited solid returns over the last few months and may actually be approaching a breakup point.

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 CAE and Embraer SA

The main advantage of trading using opposite CAE and Embraer SA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CAE 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 CAE Inc 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.