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 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

0.95

Correlation Coefficient

Rolls Royce  Embraer SA

Almost no diversification

The 3 months correlation between Rolls and Embraer is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings 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 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 is expected to generate 0.93 times more return on investment than Embraer SA. However, Rolls Royce Holdings is 1.07 times less risky than Embraer SA. It trades about 0.2 of its potential returns per unit of risk. Embraer SA ADR is currently generating about 0.13 per unit of risk. If you would invest  714.00  in Rolls Royce Holdings on December 28, 2024 and sell it today you would earn a total of  292.00  from holding Rolls Royce Holdings or generate 40.9% return on investment over 90 days.

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

Rolls Royce Holdings  vs.  Embraer SA ADR

Rolls Royce Holdings

Risk-Adjusted Performance

Solid

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

Embraer SA ADR

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Embraer SA revealed solid returns over the last few months and may actually be approaching a breakup point.

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 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..