Correlation Between Rolls Royce and Sembcorp Marine

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

Diversification Opportunities for Rolls Royce and Sembcorp Marine

-0.06

Correlation Coefficient

Rolls Royce  Sembcorp Marine

Good diversification

The 3 months correlation between Rolls and Sembcorp is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings PLC and Sembcorp Marine in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sembcorp Marine 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 Sembcorp Marine. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sembcorp Marine has no effect on the direction of Rolls Royce i.e., Rolls Royce and Sembcorp Marine go up and down completely randomly.

Pair Corralation between Rolls Royce and Sembcorp Marine

Assuming the 90 days horizon Rolls Royce Holdings PLC is expected to generate 0.53 times more return on investment than Sembcorp Marine. However, Rolls Royce Holdings PLC is 1.88 times less risky than Sembcorp Marine. It trades about 0.19 of its potential returns per unit of risk. Sembcorp Marine is currently generating about 0.07 per unit of risk. If you would invest  714.00  in Rolls Royce Holdings PLC on December 29, 2024 and sell it today you would earn a total of  277.00  from holding Rolls Royce Holdings PLC or generate 38.8% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.31%
Values	Daily Returns

Rolls Royce Holdings PLC  vs.  Sembcorp Marine

Rolls Royce Holdings

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings PLC are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Rolls Royce reported solid returns over the last few months and may actually be approaching a breakup point.

Sembcorp Marine

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Sembcorp Marine are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady primary indicators, Sembcorp Marine reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rolls Royce and Sembcorp Marine

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

The idea behind Rolls Royce Holdings PLC and Sembcorp Marine 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.