Correlation Between Rolls Royce and Mercury Systems

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

Diversification Opportunities for Rolls Royce and Mercury Systems

0.47

Correlation Coefficient

Rolls Royce  Mercury Systems

Very weak diversification

The 3 months correlation between Rolls and Mercury is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings and Mercury Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mercury Systems 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 Mercury Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mercury Systems has no effect on the direction of Rolls Royce i.e., Rolls Royce and Mercury Systems go up and down completely randomly.

Pair Corralation between Rolls Royce and Mercury Systems

Assuming the 90 days horizon Rolls Royce Holdings is expected to generate 0.94 times more return on investment than Mercury Systems. However, Rolls Royce Holdings is 1.07 times less risky than Mercury Systems. It trades about 0.2 of its potential returns per unit of risk. Mercury Systems is currently generating about 0.03 per unit of risk. If you would invest  714.00  in Rolls Royce Holdings on December 29, 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	Weak
Accuracy	100.0%
Values	Daily Returns

Rolls Royce Holdings  vs.  Mercury Systems

Rolls Royce Holdings

Risk-Adjusted Performance

Good

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.

Mercury Systems

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Mercury Systems are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal fundamental indicators, Mercury Systems may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Rolls Royce and Mercury Systems

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

The idea behind Rolls Royce Holdings and Mercury Systems 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.