Correlation Between BAE Systems and Rheinmetall

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

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

Diversification Opportunities for BAE Systems and Rheinmetall

-0.55

Correlation Coefficient

BAE Systems  Rheinmetall

Excellent diversification

The 3 months correlation between BAE and Rheinmetall is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and Rheinmetall AG ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rheinmetall AG ADR and BAE Systems 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 BAE Systems PLC are associated (or correlated) with Rheinmetall. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rheinmetall AG ADR has no effect on the direction of BAE Systems i.e., BAE Systems and Rheinmetall go up and down completely randomly.

Pair Corralation between BAE Systems and Rheinmetall

Assuming the 90 days horizon BAE Systems PLC is expected to under-perform the Rheinmetall. In addition to that, BAE Systems is 1.03 times more volatile than Rheinmetall AG ADR. It trades about -0.02 of its total potential returns per unit of risk. Rheinmetall AG ADR is currently generating about 0.09 per unit of volatility. If you would invest  10,323  in Rheinmetall AG ADR on September 30, 2024 and sell it today you would earn a total of  2,533  from holding Rheinmetall AG ADR or generate 24.54% return on investment over 90 days.

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

BAE Systems PLC  vs.  Rheinmetall AG ADR

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. Despite latest weak performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Rheinmetall AG ADR

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rheinmetall AG ADR are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental drivers, Rheinmetall showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BAE Systems and Rheinmetall

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

The idea behind BAE Systems PLC and Rheinmetall AG 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.

Check out your portfolio center.

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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.