Correlation Between BAE Systems and Raytheon Technologies

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

Diversification Opportunities for BAE Systems and Raytheon Technologies

0.76

Correlation Coefficient

BAE Systems  Raytheon Technologies

Poor diversification

The 3 months correlation between BAE and Raytheon is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and Raytheon Technologies Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Raytheon Technologies 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 Raytheon Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Raytheon Technologies has no effect on the direction of BAE Systems i.e., BAE Systems and Raytheon Technologies go up and down completely randomly.

Pair Corralation between BAE Systems and Raytheon Technologies

Assuming the 90 days horizon BAE Systems PLC is expected to generate 2.39 times more return on investment than Raytheon Technologies. However, BAE Systems is 2.39 times more volatile than Raytheon Technologies Corp. It trades about 0.2 of its potential returns per unit of risk. Raytheon Technologies Corp is currently generating about 0.19 per unit of risk. If you would invest  5,730  in BAE Systems PLC on December 28, 2024 and sell it today you would earn a total of  2,571  from holding BAE Systems PLC or generate 44.87% return on investment over 90 days.

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

BAE Systems PLC  vs.  Raytheon Technologies Corp

BAE Systems PLC

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BAE Systems PLC are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, BAE Systems showed solid returns over the last few months and may actually be approaching a breakup point.

Raytheon Technologies

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Raytheon Technologies Corp are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Raytheon Technologies showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BAE Systems and Raytheon Technologies

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

The idea behind BAE Systems PLC and Raytheon Technologies Corp 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.