Correlation Between Ford and Rheinmetall

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

By analyzing existing cross correlation between Ford Motor and Rheinmetall AG, you can compare the effects of market volatilities on Ford and Rheinmetall 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 Ford with a short position of Rheinmetall. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Rheinmetall.

Diversification Opportunities for Ford and Rheinmetall

0.3

Correlation Coefficient

Ford  Rheinmetall

Weak diversification

The 3 months correlation between Ford and Rheinmetall is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Rheinmetall AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rheinmetall AG and Ford 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 Ford Motor are associated (or correlated) with Rheinmetall. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rheinmetall AG has no effect on the direction of Ford i.e., Ford and Rheinmetall go up and down completely randomly.

Pair Corralation between Ford and Rheinmetall

Taking into account the 90-day investment horizon Ford is expected to generate 4.36 times less return on investment than Rheinmetall. But when comparing it to its historical volatility, Ford Motor is 1.56 times less risky than Rheinmetall. It trades about 0.03 of its potential returns per unit of risk. Rheinmetall AG is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  55,872  in Rheinmetall AG on September 11, 2024 and sell it today you would earn a total of  7,728  from holding Rheinmetall AG or generate 13.83% return on investment over 90 days.

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

Ford Motor  vs.  Rheinmetall AG

Ford Motor

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Ford Motor are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Ford is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Rheinmetall AG

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rheinmetall AG are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain fundamental drivers, Rheinmetall reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ford and Rheinmetall

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

The idea behind Ford Motor and Rheinmetall AG 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.