Correlation Between Embraer SA and Rolls Royce

Can any of the company-specific risk be diversified away by investing in both Embraer SA and Rolls Royce 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 Rolls Royce 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 Rolls Royce Holdings, you can compare the effects of market volatilities on Embraer SA and Rolls Royce 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 Rolls Royce. Check out your portfolio center. Please also check ongoing floating volatility patterns of Embraer SA and Rolls Royce.

Diversification Opportunities for Embraer SA and Rolls Royce

0.04

Correlation Coefficient

Embraer SA  Rolls Royce

Significant diversification

The 3 months correlation between Embraer and Rolls is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Embraer SA ADR and Rolls Royce Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rolls Royce Holdings 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 Rolls Royce. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rolls Royce Holdings has no effect on the direction of Embraer SA i.e., Embraer SA and Rolls Royce go up and down completely randomly.

Pair Corralation between Embraer SA and Rolls Royce

Considering the 90-day investment horizon Embraer SA is expected to generate 3.0 times less return on investment than Rolls Royce. In addition to that, Embraer SA is 1.39 times more volatile than Rolls Royce Holdings. It trades about 0.03 of its total potential returns per unit of risk. Rolls Royce Holdings is currently generating about 0.14 per unit of volatility. If you would invest  625.00  in Rolls Royce Holdings on September 5, 2024 and sell it today you would earn a total of  100.00  from holding Rolls Royce Holdings or generate 16.0% return on investment over 90 days.

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

Embraer SA ADR  vs.  Rolls Royce Holdings

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.

Rolls Royce Holdings

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Rolls Royce showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Embraer SA and Rolls Royce

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

The idea behind Embraer SA ADR and Rolls Royce Holdings 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.