Correlation Between BHP and Rio Tinto
Can any of the company-specific risk be diversified away by investing in both BHP 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 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 and Rio Tinto Group, you can compare the effects of market volatilities on BHP 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 with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of BHP and Rio Tinto.
Diversification Opportunities for BHP and Rio Tinto
Poor diversification
The 3 months correlation between BHP and Rio is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding BHP Group and Rio Tinto Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto Group and BHP 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 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 Group has no effect on the direction of BHP i.e., BHP and Rio Tinto go up and down completely randomly.
Pair Corralation between BHP and Rio Tinto
Assuming the 90 days trading horizon BHP is expected to generate 1.35 times less return on investment than Rio Tinto. But when comparing it to its historical volatility, BHP Group is 1.46 times less risky than Rio Tinto. It trades about 0.04 of its potential returns per unit of risk. Rio Tinto Group is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 102,491 in Rio Tinto Group on August 26, 2024 and sell it today you would earn a total of 22,024 from holding Rio Tinto Group or generate 21.49% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
BHP Group vs. Rio Tinto Group
Performance |
| Timeline |
| BHP Group |
| Rio Tinto Group |
BHP and Rio Tinto Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with BHP and Rio Tinto
The main advantage of trading using opposite BHP and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BHP 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 and Rio Tinto Group 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.| Rio Tinto vs. Vale SA | Rio Tinto vs. Glencore plc | Rio Tinto vs. Cleveland Cliffs | Rio Tinto vs. Minera Frisco SAB |
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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.
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