Correlation Between MTU Aero and Embraer SA

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

Diversification Opportunities for MTU Aero and Embraer SA

0.38

Correlation Coefficient

MTU Aero  Embraer SA

Weak diversification

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

Pair Corralation between MTU Aero and Embraer SA

Assuming the 90 days horizon MTU Aero Engines is expected to generate 0.6 times more return on investment than Embraer SA. However, MTU Aero Engines is 1.67 times less risky than Embraer SA. It trades about 0.12 of its potential returns per unit of risk. Embraer SA ADR is currently generating about 0.04 per unit of risk. If you would invest  15,431  in MTU Aero Engines on September 14, 2024 and sell it today you would earn a total of  1,537  from holding MTU Aero Engines or generate 9.96% return on investment over 90 days.

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

MTU Aero Engines  vs.  Embraer SA ADR

MTU Aero Engines

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MTU Aero Engines are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, MTU Aero may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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.

Pair Trading with MTU Aero and Embraer SA

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

The idea behind MTU Aero Engines and Embraer SA ADR 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.