Correlation Between MTU Aero and BAE Systems

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

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

Diversification Opportunities for MTU Aero and BAE Systems

-0.03

Correlation Coefficient

MTU Aero  BAE Systems

Good diversification

The 3 months correlation between MTU and BAE is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding MTU Aero Engines and BAE Systems PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BAE Systems PLC and MTU Aero 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 MTU Aero Engines are associated (or correlated) with BAE Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BAE Systems PLC has no effect on the direction of MTU Aero i.e., MTU Aero and BAE Systems go up and down completely randomly.

Pair Corralation between MTU Aero and BAE Systems

Assuming the 90 days horizon MTU Aero Engines is expected to generate 0.77 times more return on investment than BAE Systems. However, MTU Aero Engines is 1.3 times less risky than BAE Systems. It trades about 0.16 of its potential returns per unit of risk. BAE Systems PLC is currently generating about -0.05 per unit of risk. 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 Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

MTU Aero Engines  vs.  BAE Systems PLC

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.

BAE Systems PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, BAE Systems is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with MTU Aero and BAE Systems

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

The idea behind MTU Aero Engines and BAE Systems 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.