Correlation Between BHP Group and Rio Tinto
Can any of the company-specific risk be diversified away by investing in both BHP Group and Rio Tinto 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 BHP Group and Rio Tinto into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BHP Group Limited and Rio Tinto PLC, you can compare the effects of market volatilities on BHP Group and Rio Tinto 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 BHP Group with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of BHP Group and Rio Tinto.
Diversification Opportunities for BHP Group and Rio Tinto
No risk reduction
The 3 months correlation between BHP and Rio is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding BHP Group Limited and Rio Tinto PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto PLC and BHP Group 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 BHP Group Limited are associated (or correlated) with Rio Tinto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rio Tinto PLC has no effect on the direction of BHP Group i.e., BHP Group and Rio Tinto go up and down completely randomly.
Pair Corralation between BHP Group and Rio Tinto
Assuming the 90 days trading horizon BHP Group Limited is expected to generate 0.77 times more return on investment than Rio Tinto. However, BHP Group Limited is 1.31 times less risky than Rio Tinto. It trades about 0.08 of its potential returns per unit of risk. Rio Tinto PLC is currently generating about 0.03 per unit of risk. If you would invest 1,441,332 in BHP Group Limited on August 27, 2024 and sell it today you would earn a total of 1,448,668 from holding BHP Group Limited or generate 100.51% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
BHP Group Limited vs. Rio Tinto PLC
Performance |
| Timeline |
| BHP Group Limited |
| Rio Tinto PLC |
BHP Group and Rio Tinto Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BHP Group and Rio Tinto
The main advantage of trading using opposite BHP Group and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BHP Group position performs unexpectedly, Rio Tinto 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 Rio Tinto will offset losses from the drop in Rio Tinto's long position.The idea behind BHP Group Limited and Rio Tinto 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.Check out your portfolio center.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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
Other Complementary Tools
| Portfolio Anywhere Track or share privately all of your investments from the convenience of any device | |
| Portfolio Analyzer Portfolio analysis module that provides access to portfolio diagnostics and optimization engine | |
| Bond Analysis Evaluate and analyze corporate bonds as a potential investment for your portfolios. | |
| Analyst Advice Analyst recommendations and target price estimates broken down by several categories | |
| Risk-Return Analysis View associations between returns expected from investment and the risk you assume |