Correlation Between Arafura Resources and First Energy

Can any of the company-specific risk be diversified away by investing in both Arafura Resources and First Energy 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 Arafura Resources and First Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Arafura Resources and First Energy Metals, you can compare the effects of market volatilities on Arafura Resources and First Energy 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 Arafura Resources with a short position of First Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Arafura Resources and First Energy.

Diversification Opportunities for Arafura Resources and First Energy

-0.72

Correlation Coefficient

Arafura Resources  First Energy

Pay attention - limited upside

The 3 months correlation between Arafura and First is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Arafura Resources and First Energy Metals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Energy Metals and Arafura Resources 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 Arafura Resources are associated (or correlated) with First Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Energy Metals has no effect on the direction of Arafura Resources i.e., Arafura Resources and First Energy go up and down completely randomly.

Pair Corralation between Arafura Resources and First Energy

Assuming the 90 days horizon Arafura Resources is expected to generate 0.77 times more return on investment than First Energy. However, Arafura Resources is 1.3 times less risky than First Energy. It trades about 0.13 of its potential returns per unit of risk. First Energy Metals is currently generating about 0.0 per unit of risk. If you would invest  7.20  in Arafura Resources on December 29, 2024 and sell it today you would earn a total of  4.80  from holding Arafura Resources or generate 66.67% return on investment over 90 days.

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

Arafura Resources  vs.  First Energy Metals

Arafura Resources

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Arafura Resources are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady technical and fundamental indicators, Arafura Resources reported solid returns over the last few months and may actually be approaching a breakup point.

First Energy Metals

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Energy Metals has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, First Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Arafura Resources and First Energy

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

The idea behind Arafura Resources and First Energy Metals 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.