Correlation Between Leonardo SpA and Rotork Plc

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

By analyzing existing cross correlation between Leonardo SpA ADR and Rotork plc, you can compare the effects of market volatilities on Leonardo SpA and Rotork Plc 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 Leonardo SpA with a short position of Rotork Plc. Check out your portfolio center. Please also check ongoing floating volatility patterns of Leonardo SpA and Rotork Plc.

Diversification Opportunities for Leonardo SpA and Rotork Plc

0.08

Correlation Coefficient

Leonardo SpA  Rotork Plc

Significant diversification

The 3 months correlation between Leonardo and Rotork is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Leonardo SpA ADR and Rotork plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rotork plc and Leonardo SpA 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 Leonardo SpA ADR are associated (or correlated) with Rotork Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rotork plc has no effect on the direction of Leonardo SpA i.e., Leonardo SpA and Rotork Plc go up and down completely randomly.

Pair Corralation between Leonardo SpA and Rotork Plc

Assuming the 90 days horizon Leonardo SpA ADR is expected to generate 0.88 times more return on investment than Rotork Plc. However, Leonardo SpA ADR is 1.13 times less risky than Rotork Plc. It trades about 0.27 of its potential returns per unit of risk. Rotork plc is currently generating about -0.01 per unit of risk. If you would invest  1,346  in Leonardo SpA ADR on December 30, 2024 and sell it today you would earn a total of  1,074  from holding Leonardo SpA ADR or generate 79.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	96.77%
Values	Daily Returns

Leonardo SpA ADR  vs.  Rotork plc

Leonardo SpA ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Leonardo SpA ADR are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile primary indicators, Leonardo SpA showed solid returns over the last few months and may actually be approaching a breakup point.

Rotork plc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rotork plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Rotork Plc is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Leonardo SpA and Rotork Plc

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

The idea behind Leonardo SpA ADR and Rotork 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.