Correlation Between Leonardo SpA and Transdigm Group

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

Diversification Opportunities for Leonardo SpA and Transdigm Group

0.64

Correlation Coefficient

Leonardo SpA  Transdigm Group

Poor diversification

The 3 months correlation between Leonardo and Transdigm is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Leonardo SpA ADR and Transdigm Group Incorporated in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transdigm Group 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 Transdigm Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transdigm Group has no effect on the direction of Leonardo SpA i.e., Leonardo SpA and Transdigm Group go up and down completely randomly.

Pair Corralation between Leonardo SpA and Transdigm Group

Assuming the 90 days horizon Leonardo SpA ADR is expected to generate 1.4 times more return on investment than Transdigm Group. However, Leonardo SpA is 1.4 times more volatile than Transdigm Group Incorporated. It trades about 0.35 of its potential returns per unit of risk. Transdigm Group Incorporated is currently generating about 0.1 per unit of risk. If you would invest  1,353  in Leonardo SpA ADR on December 2, 2024 and sell it today you would earn a total of  720.00  from holding Leonardo SpA ADR or generate 53.22% return on investment over 90 days.

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

Leonardo SpA ADR  vs.  Transdigm Group Incorporated

Leonardo SpA ADR

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Leonardo SpA ADR are ranked lower than 27 (%) 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.

Transdigm Group

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Transdigm Group Incorporated are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak fundamental indicators, Transdigm Group may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Leonardo SpA and Transdigm Group

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

The idea behind Leonardo SpA ADR and Transdigm Group Incorporated 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.