Correlation Between American Rare and Critical Elements

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

By analyzing existing cross correlation between American Rare Earths and Critical Elements, you can compare the effects of market volatilities on American Rare and Critical Elements 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 American Rare with a short position of Critical Elements. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Rare and Critical Elements.

Diversification Opportunities for American Rare and Critical Elements

0.59

Correlation Coefficient

American Rare  Critical Elements

Very weak diversification

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

Pair Corralation between American Rare and Critical Elements

Assuming the 90 days horizon American Rare is expected to generate 2.98 times less return on investment than Critical Elements. But when comparing it to its historical volatility, American Rare Earths is 2.0 times less risky than Critical Elements. It trades about 0.07 of its potential returns per unit of risk. Critical Elements is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  26.00  in Critical Elements on December 30, 2024 and sell it today you would earn a total of  9.00  from holding Critical Elements or generate 34.62% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

American Rare Earths  vs.  Critical Elements

American Rare Earths

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American Rare Earths are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, American Rare reported solid returns over the last few months and may actually be approaching a breakup point.

Critical Elements

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Critical Elements are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental indicators, Critical Elements reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Rare and Critical Elements

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

The idea behind American Rare Earths and Critical Elements 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.