Correlation Between Rheinmetall and Embraer SA

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

By analyzing existing cross correlation between Rheinmetall AG ADR and Embraer SA ADR, you can compare the effects of market volatilities on Rheinmetall and Embraer SA 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 Rheinmetall with a short position of Embraer SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rheinmetall and Embraer SA.

Diversification Opportunities for Rheinmetall and Embraer SA

0.76

Correlation Coefficient

Rheinmetall  Embraer SA

Poor diversification

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

Pair Corralation between Rheinmetall and Embraer SA

Assuming the 90 days horizon Rheinmetall is expected to generate 1.57 times less return on investment than Embraer SA. But when comparing it to its historical volatility, Rheinmetall AG ADR is 1.3 times less risky than Embraer SA. It trades about 0.09 of its potential returns per unit of risk. Embraer SA ADR is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  2,590  in Embraer SA ADR on September 30, 2024 and sell it today you would earn a total of  1,055  from holding Embraer SA ADR or generate 40.73% return on investment over 90 days.

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

Rheinmetall AG ADR  vs.  Embraer SA ADR

Rheinmetall AG ADR

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rheinmetall AG ADR are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental drivers, Rheinmetall showed solid returns over the last few months and may actually be approaching a breakup point.

Embraer SA ADR

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively steady basic indicators, Embraer SA is not utilizing all of its potentials. The current stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with Rheinmetall and Embraer SA

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

The idea behind Rheinmetall AG ADR and Embraer SA 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 Global Correlations module to find global opportunities by holding instruments from different markets.