Correlation Between General Dynamics and Rolls-Royce Holdings

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

By analyzing existing cross correlation between General Dynamics and Rolls Royce Holdings plc, you can compare the effects of market volatilities on General Dynamics and Rolls-Royce Holdings 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 Rolls-Royce Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of General Dynamics and Rolls-Royce Holdings.

Diversification Opportunities for General Dynamics and Rolls-Royce Holdings

-0.66

Correlation Coefficient

General Dynamics  Rolls-Royce Holdings

Excellent diversification

The 3 months correlation between General and Rolls-Royce is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding General Dynamics and Rolls Royce Holdings plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rolls Royce Holdings 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 Rolls-Royce Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rolls Royce Holdings has no effect on the direction of General Dynamics i.e., General Dynamics and Rolls-Royce Holdings go up and down completely randomly.

Pair Corralation between General Dynamics and Rolls-Royce Holdings

Assuming the 90 days horizon General Dynamics is expected to under-perform the Rolls-Royce Holdings. But the stock apears to be less risky and, when comparing its historical volatility, General Dynamics is 2.53 times less risky than Rolls-Royce Holdings. The stock trades about -0.05 of its potential returns per unit of risk. The Rolls Royce Holdings plc is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  741.00  in Rolls Royce Holdings plc on December 2, 2024 and sell it today you would earn a total of  191.00  from holding Rolls Royce Holdings plc or generate 25.78% return on investment over 90 days.

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

General Dynamics  vs.  Rolls Royce Holdings plc

General Dynamics

Risk-Adjusted Performance

Very Weak

Over the last 90 days General Dynamics 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.

Rolls Royce Holdings

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Rolls-Royce Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with General Dynamics and Rolls-Royce Holdings

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

The idea behind General Dynamics and Rolls Royce Holdings 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.