Correlation Between Embraer SA and General Dynamics

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

By analyzing existing cross correlation between Embraer SA ADR and General Dynamics, you can compare the effects of market volatilities on Embraer SA and General Dynamics 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 Embraer SA with a short position of General Dynamics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Embraer SA and General Dynamics.

Diversification Opportunities for Embraer SA and General Dynamics

0.85

Correlation Coefficient

Embraer SA  General Dynamics

Very poor diversification

The 3 months correlation between Embraer and General is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Embraer SA ADR and General Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Dynamics and Embraer 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 Embraer SA ADR are associated (or correlated) with General Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Dynamics has no effect on the direction of Embraer SA i.e., Embraer SA and General Dynamics go up and down completely randomly.

Pair Corralation between Embraer SA and General Dynamics

Considering the 90-day investment horizon Embraer SA ADR is expected to generate 3.15 times more return on investment than General Dynamics. However, Embraer SA is 3.15 times more volatile than General Dynamics. It trades about 0.3 of its potential returns per unit of risk. General Dynamics is currently generating about 0.2 per unit of risk. If you would invest  1,846  in Embraer SA ADR on February 19, 2024 and sell it today you would earn a total of  1,247  from holding Embraer SA ADR or generate 67.55% return on investment over 90 days.

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

Embraer SA ADR  vs.  General Dynamics

Embraer SA ADR

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Embraer SA ADR are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Embraer SA revealed solid returns over the last few months and may actually be approaching a breakup point.

General Dynamics

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in General Dynamics are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain fundamental indicators, General Dynamics may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Embraer SA and General Dynamics

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

The idea behind Embraer SA ADR and General Dynamics 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.