Correlation Between South32 and BHP Group
Can any of the company-specific risk be diversified away by investing in both South32 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 South32 and BHP Group into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between South32 Limited and BHP Group Limited, you can compare the effects of market volatilities on South32 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 South32 with a short position of BHP Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of South32 and BHP Group.
Diversification Opportunities for South32 and BHP Group
Very weak diversification
The 3 months correlation between South32 and BHP is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding South32 Limited 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 South32 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 South32 Limited 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 South32 i.e., South32 and BHP Group go up and down completely randomly.
Pair Corralation between South32 and BHP Group
Assuming the 90 days horizon South32 Limited is expected to generate 2.51 times more return on investment than BHP Group. However, South32 is 2.51 times more volatile than BHP Group Limited. It trades about 0.02 of its potential returns per unit of risk. BHP Group Limited is currently generating about -0.01 per unit of risk. If you would invest 257.00 in South32 Limited on August 28, 2024 and sell it today you would lose (11.00) from holding South32 Limited or give up 4.28% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 78.99% |
| Values | Daily Returns |
South32 Limited vs. BHP Group Limited
Performance |
| Timeline |
| South32 Limited |
| BHP Group Limited |
South32 and BHP Group Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with South32 and BHP Group
The main advantage of trading using opposite South32 and BHP Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if South32 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.The idea behind South32 Limited and BHP Group Limited 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.| BHP Group vs. Vale SA ADR | BHP Group vs. Teck Resources Ltd | BHP Group vs. Lithium Americas Corp | BHP Group vs. MP Materials Corp |
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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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