Correlation Between Rolls Royce and Exxon Mobil

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

Diversification Opportunities for Rolls Royce and Exxon Mobil

0.42

Correlation Coefficient

Rolls Royce  Exxon Mobil

Very weak diversification

The 3 months correlation between Rolls and Exxon is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings plc and Exxon Mobil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exxon Mobil 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 Exxon Mobil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exxon Mobil has no effect on the direction of Rolls Royce i.e., Rolls Royce and Exxon Mobil go up and down completely randomly.

Pair Corralation between Rolls Royce and Exxon Mobil

Assuming the 90 days horizon Rolls Royce Holdings plc is expected to generate 1.34 times more return on investment than Exxon Mobil. However, Rolls Royce is 1.34 times more volatile than Exxon Mobil. It trades about 0.14 of its potential returns per unit of risk. Exxon Mobil is currently generating about 0.06 per unit of risk. If you would invest  589.00  in Rolls Royce Holdings plc on September 16, 2024 and sell it today you would earn a total of  116.00  from holding Rolls Royce Holdings plc or generate 19.69% return on investment over 90 days.

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

Rolls Royce Holdings plc  vs.  Exxon Mobil

Rolls Royce Holdings

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Rolls Royce reported solid returns over the last few months and may actually be approaching a breakup point.

Exxon Mobil

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Exxon Mobil is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Rolls Royce and Exxon Mobil

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

The idea behind Rolls Royce Holdings plc and Exxon Mobil 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.