Correlation Between Rolls Royce and Nine Dragons

Can any of the company-specific risk be diversified away by investing in both Rolls Royce and Nine Dragons 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 and Nine Dragons 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 Nine Dragons Paper, you can compare the effects of market volatilities on Rolls Royce and Nine Dragons 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 with a short position of Nine Dragons. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rolls Royce and Nine Dragons.

Diversification Opportunities for Rolls Royce and Nine Dragons

0.27

Correlation Coefficient

Rolls Royce  Nine Dragons

Modest diversification

The 3 months correlation between Rolls and Nine is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings plc and Nine Dragons Paper in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nine Dragons Paper and Rolls Royce 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 Nine Dragons. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nine Dragons Paper has no effect on the direction of Rolls Royce i.e., Rolls Royce and Nine Dragons go up and down completely randomly.

Pair Corralation between Rolls Royce and Nine Dragons

Assuming the 90 days horizon Rolls Royce is expected to generate 1.58 times less return on investment than Nine Dragons. But when comparing it to its historical volatility, Rolls Royce Holdings plc is 2.55 times less risky than Nine Dragons. It trades about 0.15 of its potential returns per unit of risk. Nine Dragons Paper is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  31.00  in Nine Dragons Paper on September 15, 2024 and sell it today you would earn a total of  8.00  from holding Nine Dragons Paper or generate 25.81% 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.  Nine Dragons Paper

Rolls Royce Holdings

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings plc are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Rolls Royce reported solid returns over the last few months and may actually be approaching a breakup point.

Nine Dragons Paper

Risk-Adjusted Performance

7 of 100

OK

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

Pair Trading with Rolls Royce and Nine Dragons

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

The idea behind Rolls Royce Holdings plc and Nine Dragons Paper 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.