Correlation Between Rio Tinto and BHP Group
Can any of the company-specific risk be diversified away by investing in both Rio Tinto and BHP Group 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 Rio Tinto and BHP Group into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Rio Tinto ADR and BHP Group Limited, you can compare the effects of market volatilities on Rio Tinto and BHP Group 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 Rio Tinto with a short position of BHP Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio Tinto and BHP Group.
Diversification Opportunities for Rio Tinto and BHP Group
Very poor diversification
The 3 months correlation between Rio and BHP is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto ADR and BHP Group Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BHP Group Limited and Rio Tinto 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 Rio Tinto ADR are associated (or correlated) with BHP Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BHP Group Limited has no effect on the direction of Rio Tinto i.e., Rio Tinto and BHP Group go up and down completely randomly.
Pair Corralation between Rio Tinto and BHP Group
Considering the 90-day investment horizon Rio Tinto ADR is expected to under-perform the BHP Group. But the stock apears to be less risky and, when comparing its historical volatility, Rio Tinto ADR is 2.57 times less risky than BHP Group. The stock trades about -0.01 of its potential returns per unit of risk. The BHP Group Limited is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest 2,825 in BHP Group Limited on August 27, 2024 and sell it today you would lose (224.00) from holding BHP Group Limited or give up 7.93% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Rio Tinto ADR vs. BHP Group Limited
Performance |
| Timeline |
| Rio Tinto ADR |
| BHP Group Limited |
Rio Tinto and BHP Group Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Rio Tinto and BHP Group
The main advantage of trading using opposite Rio Tinto and BHP Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rio Tinto position performs unexpectedly, BHP Group 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 BHP Group will offset losses from the drop in BHP Group's long position.| Rio Tinto vs. Vale SA ADR | Rio Tinto vs. Teck Resources Ltd | Rio Tinto vs. MP Materials Corp | Rio Tinto vs. Lithium Americas Corp |
| BHP Group vs. Anglo American PLC | BHP Group vs. Avarone Metals | BHP Group vs. Huntsman Exploration | BHP Group vs. Aurelia Metals 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.
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