Correlation Between Rolls Royce and AeroVironment

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

By analyzing existing cross correlation between Rolls Royce Holdings and AeroVironment, you can compare the effects of market volatilities on Rolls Royce and AeroVironment 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 AeroVironment. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rolls Royce and AeroVironment.

Diversification Opportunities for Rolls Royce and AeroVironment

0.83

Correlation Coefficient

Rolls Royce  AeroVironment

Very poor diversification

The 3 months correlation between Rolls and AeroVironment is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings and AeroVironment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AeroVironment 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 are associated (or correlated) with AeroVironment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AeroVironment has no effect on the direction of Rolls Royce i.e., Rolls Royce and AeroVironment go up and down completely randomly.

Pair Corralation between Rolls Royce and AeroVironment

Assuming the 90 days horizon Rolls Royce Holdings is expected to generate 0.61 times more return on investment than AeroVironment. However, Rolls Royce Holdings is 1.65 times less risky than AeroVironment. It trades about 0.05 of its potential returns per unit of risk. AeroVironment is currently generating about -0.02 per unit of risk. If you would invest  651.00  in Rolls Royce Holdings on August 30, 2024 and sell it today you would earn a total of  31.00  from holding Rolls Royce Holdings or generate 4.76% return on investment over 90 days.

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

Rolls Royce Holdings  vs.  AeroVironment

Rolls Royce Holdings

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, Rolls Royce is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

AeroVironment

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AeroVironment has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, AeroVironment is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Rolls Royce and AeroVironment

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

The idea behind Rolls Royce Holdings and AeroVironment 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.