Correlation Between Rolls Royce and Embraer SA

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

Diversification Opportunities for Rolls Royce and Embraer SA

-0.01

Correlation Coefficient

Rolls Royce  Embraer SA

Good diversification

The 3 months correlation between Rolls and Embraer is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings PLC 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 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 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 Rolls Royce i.e., Rolls Royce and Embraer SA go up and down completely randomly.

Pair Corralation between Rolls Royce and Embraer SA

Assuming the 90 days horizon Rolls Royce Holdings PLC is expected to generate 0.78 times more return on investment than Embraer SA. However, Rolls Royce Holdings PLC is 1.28 times less risky than Embraer SA. It trades about 0.1 of its potential returns per unit of risk. Embraer SA ADR is currently generating about 0.01 per unit of risk. If you would invest  653.00  in Rolls Royce Holdings PLC on September 13, 2024 and sell it today you would earn a total of  75.00  from holding Rolls Royce Holdings PLC or generate 11.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Rolls Royce Holdings PLC  vs.  Embraer SA ADR

Rolls Royce Holdings

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly inconsistent technical and fundamental indicators, Rolls Royce may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Embraer SA ADR

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Embraer SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. 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 Rolls Royce and Embraer SA

The main advantage of trading using opposite Rolls Royce and Embraer SA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rolls Royce 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 Rolls Royce Holdings PLC 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.

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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.