Correlation Between General Dynamics and Embraer SA

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

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

Diversification Opportunities for General Dynamics and Embraer SA

-0.4

Correlation Coefficient

General Dynamics  Embraer SA

Very good diversification

The 3 months correlation between General and Embraer is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding General Dynamics and Embraer SA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Embraer SA ADR and General Dynamics 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 General Dynamics are associated (or correlated) with Embraer SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Embraer SA ADR has no effect on the direction of General Dynamics i.e., General Dynamics and Embraer SA go up and down completely randomly.

Pair Corralation between General Dynamics and Embraer SA

Allowing for the 90-day total investment horizon General Dynamics is expected to under-perform the Embraer SA. But the stock apears to be less risky and, when comparing its historical volatility, General Dynamics is 2.22 times less risky than Embraer SA. The stock trades about -0.03 of its potential returns per unit of risk. The Embraer SA ADR is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  2,590  in Embraer SA ADR on September 30, 2024 and sell it today you would earn a total of  1,055  from holding Embraer SA ADR or generate 40.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

General Dynamics  vs.  Embraer SA ADR

General Dynamics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days General Dynamics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Embraer SA ADR

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively steady basic indicators, Embraer SA is not utilizing all of its potentials. The current stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with General Dynamics and Embraer SA

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

The idea behind General Dynamics and Embraer SA ADR 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.