Correlation Between Embraer SA and MTU Aero

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

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

Diversification Opportunities for Embraer SA and MTU Aero

0.38

Correlation Coefficient

Embraer SA  MTU Aero

Weak diversification

The 3 months correlation between Embraer and MTU is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Embraer SA ADR and MTU Aero Engines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MTU Aero Engines and Embraer SA 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 Embraer SA ADR are associated (or correlated) with MTU Aero. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MTU Aero Engines has no effect on the direction of Embraer SA i.e., Embraer SA and MTU Aero go up and down completely randomly.

Pair Corralation between Embraer SA and MTU Aero

Considering the 90-day investment horizon Embraer SA is expected to generate 2.66 times less return on investment than MTU Aero. In addition to that, Embraer SA is 1.81 times more volatile than MTU Aero Engines. It trades about 0.03 of its total potential returns per unit of risk. MTU Aero Engines is currently generating about 0.16 per unit of volatility. If you would invest  14,738  in MTU Aero Engines on September 5, 2024 and sell it today you would earn a total of  2,093  from holding MTU Aero Engines or generate 14.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Embraer SA ADR  vs.  MTU Aero Engines

Embraer SA ADR

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively steady basic indicators, Embraer SA is not utilizing all of its potentials. The current stock price chaos, may contribute to medium-term losses for the stakeholders.

MTU Aero Engines

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MTU Aero Engines are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, MTU Aero showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Embraer SA and MTU Aero

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

The idea behind Embraer SA ADR and MTU Aero Engines 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.

Check out your portfolio center.

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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.