Correlation Between Metals X and Rio Tinto
Can any of the company-specific risk be diversified away by investing in both Metals X 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 Metals X and Rio Tinto into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Metals X Limited and Rio Tinto ADR, you can compare the effects of market volatilities on Metals X 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 Metals X with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Metals X and Rio Tinto.
Diversification Opportunities for Metals X and Rio Tinto
Poor diversification
The 3 months correlation between Metals and Rio is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Metals X Limited and Rio Tinto ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto ADR and Metals X 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 Metals X 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 ADR has no effect on the direction of Metals X i.e., Metals X and Rio Tinto go up and down completely randomly.
Pair Corralation between Metals X and Rio Tinto
Assuming the 90 days horizon Metals X Limited is expected to under-perform the Rio Tinto. In addition to that, Metals X is 3.07 times more volatile than Rio Tinto ADR. It trades about -0.17 of its total potential returns per unit of risk. Rio Tinto ADR is currently generating about -0.17 per unit of volatility. If you would invest 6,618 in Rio Tinto ADR on August 29, 2024 and sell it today you would lose (415.00) from holding Rio Tinto ADR or give up 6.27% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Metals X Limited vs. Rio Tinto ADR
Performance |
| Timeline |
| Metals X Limited |
| Rio Tinto ADR |
Risk-Adjusted Performance
0 of 100
Weak | Strong |
Very Weak
Metals X and Rio Tinto Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Metals X and Rio Tinto
The main advantage of trading using opposite Metals X and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Metals X 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 Metals X Limited and Rio Tinto ADR 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 ADR | Rio Tinto vs. Teck Resources Ltd | Rio Tinto vs. Lithium Americas Corp | Rio Tinto vs. BHP Group Limited |
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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.
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