Correlation Between Rolls-Royce Holdings and Transdigm Group

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

Diversification Opportunities for Rolls-Royce Holdings and Transdigm Group

0.29

Correlation Coefficient

Rolls-Royce Holdings  Transdigm Group

Modest diversification

The 3 months correlation between Rolls-Royce and Transdigm is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings plc and Transdigm Group Incorporated in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transdigm Group 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 Transdigm Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transdigm Group has no effect on the direction of Rolls-Royce Holdings i.e., Rolls-Royce Holdings and Transdigm Group go up and down completely randomly.

Pair Corralation between Rolls-Royce Holdings and Transdigm Group

Assuming the 90 days horizon Rolls Royce Holdings plc is expected to generate 3.8 times more return on investment than Transdigm Group. However, Rolls-Royce Holdings is 3.8 times more volatile than Transdigm Group Incorporated. It trades about 0.03 of its potential returns per unit of risk. Transdigm Group Incorporated is currently generating about 0.09 per unit of risk. If you would invest  0.34  in Rolls Royce Holdings plc on December 20, 2024 and sell it today you would earn a total of  0.00  from holding Rolls Royce Holdings plc or generate 0.0% return on investment over 90 days.

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

Rolls Royce Holdings plc  vs.  Transdigm Group Incorporated

Rolls Royce Holdings

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak fundamental indicators, Rolls-Royce Holdings may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Transdigm Group

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Transdigm Group Incorporated are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak fundamental indicators, Transdigm Group may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Rolls-Royce Holdings and Transdigm Group

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

The idea behind Rolls Royce Holdings plc and Transdigm Group Incorporated 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.

Check out your portfolio center.

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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.