Correlation Between Rolls Royce and BP Plc

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

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

Diversification Opportunities for Rolls Royce and BP Plc

-0.3

Correlation Coefficient

Rolls Royce  BP Plc

Very good diversification

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

Pair Corralation between Rolls Royce and BP Plc

Assuming the 90 days horizon Rolls Royce Holdings plc is expected to generate 1.25 times more return on investment than BP Plc. However, Rolls Royce is 1.25 times more volatile than BP plc. It trades about 0.22 of its potential returns per unit of risk. BP plc is currently generating about 0.08 per unit of risk. If you would invest  650.00  in Rolls Royce Holdings plc on September 17, 2024 and sell it today you would earn a total of  55.00  from holding Rolls Royce Holdings plc or generate 8.46% return on investment over 90 days.

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

Rolls Royce Holdings plc  vs.  BP plc

Rolls Royce Holdings

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Rolls Royce reported solid returns over the last few months and may actually be approaching a breakup point.

BP plc

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days BP plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, BP Plc is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Rolls Royce and BP Plc

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

The idea behind Rolls Royce Holdings plc and BP 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.