Correlation Between Rolls-Royce Holdings and Rheinmetall

Can any of the company-specific risk be diversified away by investing in both Rolls-Royce Holdings and Rheinmetall 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 Rheinmetall 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 Rheinmetall AG, you can compare the effects of market volatilities on Rolls-Royce Holdings and Rheinmetall 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 Rheinmetall. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rolls-Royce Holdings and Rheinmetall.

Diversification Opportunities for Rolls-Royce Holdings and Rheinmetall

0.76

Correlation Coefficient

Rolls-Royce Holdings  Rheinmetall

Poor diversification

The 3 months correlation between Rolls-Royce and Rheinmetall is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings plc and Rheinmetall AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rheinmetall AG 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 Rheinmetall. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rheinmetall AG has no effect on the direction of Rolls-Royce Holdings i.e., Rolls-Royce Holdings and Rheinmetall go up and down completely randomly.

Pair Corralation between Rolls-Royce Holdings and Rheinmetall

Assuming the 90 days horizon Rolls-Royce Holdings is expected to generate 2.29 times less return on investment than Rheinmetall. In addition to that, Rolls-Royce Holdings is 1.4 times more volatile than Rheinmetall AG. It trades about 0.1 of its total potential returns per unit of risk. Rheinmetall AG is currently generating about 0.32 per unit of volatility. If you would invest  64,500  in Rheinmetall AG on December 30, 2024 and sell it today you would earn a total of  77,780  from holding Rheinmetall AG or generate 120.59% return on investment over 90 days.

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

Rolls Royce Holdings plc  vs.  Rheinmetall AG

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.

Rheinmetall AG

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Rheinmetall AG are ranked lower than 25 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain fundamental drivers, Rheinmetall reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rolls-Royce Holdings and Rheinmetall

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

The idea behind Rolls Royce Holdings plc and Rheinmetall AG 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.