Correlation Between Embraer SA and Mercury Systems

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

Diversification Opportunities for Embraer SA and Mercury Systems

0.75

Correlation Coefficient

Embraer SA  Mercury Systems

Poor diversification

The 3 months correlation between Embraer and Mercury is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Embraer SA ADR and Mercury Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mercury Systems 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 Mercury Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mercury Systems has no effect on the direction of Embraer SA i.e., Embraer SA and Mercury Systems go up and down completely randomly.

Pair Corralation between Embraer SA and Mercury Systems

Considering the 90-day investment horizon Embraer SA ADR is expected to generate 0.9 times more return on investment than Mercury Systems. However, Embraer SA ADR is 1.11 times less risky than Mercury Systems. It trades about 0.1 of its potential returns per unit of risk. Mercury Systems is currently generating about 0.09 per unit of risk. If you would invest  2,415  in Embraer SA ADR on October 12, 2024 and sell it today you would earn a total of  1,349  from holding Embraer SA ADR or generate 55.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.47%
Values	Daily Returns

Embraer SA ADR  vs.  Mercury Systems

Embraer SA ADR

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Embraer SA revealed solid returns over the last few months and may actually be approaching a breakup point.

Mercury Systems

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Mercury Systems are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal fundamental indicators, Mercury Systems showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Embraer SA and Mercury Systems

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

The idea behind Embraer SA ADR and Mercury Systems 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.