Correlation Between Rolls-Royce Holdings and Howmet Aerospace

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

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

Diversification Opportunities for Rolls-Royce Holdings and Howmet Aerospace

0.15

Correlation Coefficient

Rolls-Royce Holdings  Howmet Aerospace

Average diversification

The 3 months correlation between Rolls-Royce and Howmet is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings plc and Howmet Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Howmet Aerospace and Rolls-Royce Holdings 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 Rolls Royce Holdings plc are associated (or correlated) with Howmet Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Howmet Aerospace has no effect on the direction of Rolls-Royce Holdings i.e., Rolls-Royce Holdings and Howmet Aerospace go up and down completely randomly.

Pair Corralation between Rolls-Royce Holdings and Howmet Aerospace

Assuming the 90 days horizon Rolls Royce Holdings plc is expected to generate 2.69 times more return on investment than Howmet Aerospace. However, Rolls-Royce Holdings is 2.69 times more volatile than Howmet Aerospace. It trades about 0.1 of its potential returns per unit of risk. Howmet Aerospace is currently generating about 0.13 per unit of risk. If you would invest  0.30  in Rolls Royce Holdings plc on December 30, 2024 and sell it today you would earn a total of  0.09  from holding Rolls Royce Holdings plc or generate 30.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.41%
Values	Daily Returns

Rolls Royce Holdings plc  vs.  Howmet Aerospace

Rolls Royce Holdings

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental indicators, Rolls-Royce Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Howmet Aerospace

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Howmet Aerospace are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal basic indicators, Howmet Aerospace displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rolls-Royce Holdings and Howmet Aerospace

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

The idea behind Rolls Royce Holdings plc and Howmet Aerospace 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.