Correlation Between Safran SA and Rolls Royce

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

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

Diversification Opportunities for Safran SA and Rolls Royce

0.08

Correlation Coefficient

Safran SA  Rolls Royce

Significant diversification

The 3 months correlation between Safran and Rolls is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Safran SA and Rolls Royce Holdings plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rolls Royce Holdings and Safran SA 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 Safran SA are associated (or correlated) with Rolls Royce. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rolls Royce Holdings has no effect on the direction of Safran SA i.e., Safran SA and Rolls Royce go up and down completely randomly.

Pair Corralation between Safran SA and Rolls Royce

Assuming the 90 days horizon Safran SA is expected to under-perform the Rolls Royce. But the pink sheet apears to be less risky and, when comparing its historical volatility, Safran SA is 2.65 times less risky than Rolls Royce. The pink sheet trades about -0.25 of its potential returns per unit of risk. The Rolls Royce Holdings plc is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.34  in Rolls Royce Holdings plc on September 12, 2024 and sell it today you would earn a total of  0.02  from holding Rolls Royce Holdings plc or generate 5.88% return on investment over 90 days.

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

Safran SA  vs.  Rolls Royce Holdings plc

Safran SA

Risk-Adjusted Performance

0 of 100

Very Weak

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

Rolls Royce Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rolls Royce Holdings plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable fundamental indicators, Rolls Royce is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Safran SA and Rolls Royce

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

The idea behind Safran SA and Rolls Royce Holdings plc 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.