Correlation Between Anglo American and Fortescue Metals

Can any of the company-specific risk be diversified away by investing in both Anglo American and Fortescue Metals 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 Anglo American and Fortescue Metals into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Anglo American plc and Fortescue Metals Group, you can compare the effects of market volatilities on Anglo American and Fortescue Metals 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 Anglo American with a short position of Fortescue Metals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Anglo American and Fortescue Metals.

Diversification Opportunities for Anglo American and Fortescue Metals

0.59

Correlation Coefficient

Anglo American  Fortescue Metals

Very weak diversification

The 3 months correlation between Anglo and Fortescue is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Anglo American plc and Fortescue Metals Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fortescue Metals and Anglo American 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 Anglo American plc are associated (or correlated) with Fortescue Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fortescue Metals has no effect on the direction of Anglo American i.e., Anglo American and Fortescue Metals go up and down completely randomly.

Pair Corralation between Anglo American and Fortescue Metals

Assuming the 90 days horizon Anglo American plc is expected to generate 1.13 times more return on investment than Fortescue Metals. However, Anglo American is 1.13 times more volatile than Fortescue Metals Group. It trades about 0.12 of its potential returns per unit of risk. Fortescue Metals Group is currently generating about 0.11 per unit of risk. If you would invest  2,648  in Anglo American plc on September 12, 2024 and sell it today you would earn a total of  527.00  from holding Anglo American plc or generate 19.9% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Anglo American plc  vs.  Fortescue Metals Group

Anglo American plc

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Anglo American plc are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak forward-looking signals, Anglo American reported solid returns over the last few months and may actually be approaching a breakup point.

Fortescue Metals

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fortescue Metals Group are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile technical and fundamental indicators, Fortescue Metals showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Anglo American and Fortescue Metals

The main advantage of trading using opposite Anglo American and Fortescue Metals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Anglo American position performs unexpectedly, Fortescue Metals 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 Fortescue Metals will offset losses from the drop in Fortescue Metals' long position.

The idea behind Anglo American plc and Fortescue Metals 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.

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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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.