Correlation Between Embraer SA and BAE Systems

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

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

Diversification Opportunities for Embraer SA and BAE Systems

0.04

Correlation Coefficient

Embraer SA  BAE Systems

Significant diversification

The 3 months correlation between Embraer and BAE is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Embraer SA ADR and BAE Systems PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BAE Systems PLC and Embraer SA 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 Embraer SA ADR are associated (or correlated) with BAE Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BAE Systems PLC has no effect on the direction of Embraer SA i.e., Embraer SA and BAE Systems go up and down completely randomly.

Pair Corralation between Embraer SA and BAE Systems

Considering the 90-day investment horizon Embraer SA ADR is expected to generate 0.95 times more return on investment than BAE Systems. However, Embraer SA ADR is 1.06 times less risky than BAE Systems. It trades about 0.05 of its potential returns per unit of risk. BAE Systems PLC is currently generating about -0.04 per unit of risk. If you would invest  3,479  in Embraer SA ADR on September 4, 2024 and sell it today you would earn a total of  226.00  from holding Embraer SA ADR or generate 6.5% return on investment over 90 days.

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

Embraer SA ADR  vs.  BAE Systems PLC

Embraer SA ADR

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Embraer SA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 fragile 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.

Pair Trading with Embraer SA and BAE Systems

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

The idea behind Embraer SA ADR and BAE Systems 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.