Correlation Between Leonardo Spa and Rolls-Royce Holdings

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

By analyzing existing cross correlation between Leonardo Spa and Rolls Royce Holdings PLC, you can compare the effects of market volatilities on Leonardo Spa and Rolls-Royce Holdings 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 Leonardo Spa with a short position of Rolls-Royce Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Leonardo Spa and Rolls-Royce Holdings.

Diversification Opportunities for Leonardo Spa and Rolls-Royce Holdings

0.22

Correlation Coefficient

Leonardo Spa  Rolls-Royce Holdings

Modest diversification

The 3 months correlation between Leonardo and Rolls-Royce is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Leonardo Spa and Rolls Royce Holdings PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rolls Royce Holdings and Leonardo Spa 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 Leonardo Spa are associated (or correlated) with Rolls-Royce Holdings. 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 Leonardo Spa i.e., Leonardo Spa and Rolls-Royce Holdings go up and down completely randomly.

Pair Corralation between Leonardo Spa and Rolls-Royce Holdings

Assuming the 90 days horizon Leonardo Spa is expected to generate 1.01 times less return on investment than Rolls-Royce Holdings. In addition to that, Leonardo Spa is 2.16 times more volatile than Rolls Royce Holdings PLC. It trades about 0.09 of its total potential returns per unit of risk. Rolls Royce Holdings PLC is currently generating about 0.19 per unit of volatility. If you would invest  607.00  in Rolls Royce Holdings PLC on September 6, 2024 and sell it today you would earn a total of  143.00  from holding Rolls Royce Holdings PLC or generate 23.56% return on investment over 90 days.

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

Leonardo Spa  vs.  Rolls Royce Holdings PLC

Leonardo Spa

Risk-Adjusted Performance

6 of 100

Modest

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

Rolls Royce Holdings

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings PLC are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Rolls-Royce Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Leonardo Spa and Rolls-Royce Holdings

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

The idea behind Leonardo Spa and Rolls Royce Holdings PLC 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.