Correlation Between MTU Aero and Leonardo SpA

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

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

Diversification Opportunities for MTU Aero and Leonardo SpA

0.49

Correlation Coefficient

MTU Aero  Leonardo SpA

Very weak diversification

The 3 months correlation between MTU and Leonardo is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding MTU Aero Engines and Leonardo SpA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Leonardo SpA ADR and MTU Aero 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 MTU Aero Engines are associated (or correlated) with Leonardo SpA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Leonardo SpA ADR has no effect on the direction of MTU Aero i.e., MTU Aero and Leonardo SpA go up and down completely randomly.

Pair Corralation between MTU Aero and Leonardo SpA

Assuming the 90 days horizon MTU Aero is expected to generate 7.89 times less return on investment than Leonardo SpA. But when comparing it to its historical volatility, MTU Aero Engines is 1.26 times less risky than Leonardo SpA. It trades about 0.03 of its potential returns per unit of risk. Leonardo SpA ADR is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,317  in Leonardo SpA ADR on October 17, 2024 and sell it today you would earn a total of  121.00  from holding Leonardo SpA ADR or generate 9.19% return on investment over 90 days.

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

MTU Aero Engines  vs.  Leonardo SpA ADR

MTU Aero Engines

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MTU Aero Engines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, MTU Aero is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Leonardo SpA ADR

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Leonardo SpA ADR are ranked lower than 15 (%) 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.

Pair Trading with MTU Aero and Leonardo SpA

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

The idea behind MTU Aero Engines and Leonardo SpA 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.