Correlation Between Australian United and Rio Tinto

Can any of the company-specific risk be diversified away by investing in both Australian United and Rio Tinto 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 Australian United and Rio Tinto into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Australian United Investment and Rio Tinto, you can compare the effects of market volatilities on Australian United and Rio Tinto 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 Australian United with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Australian United and Rio Tinto.

Diversification Opportunities for Australian United and Rio Tinto

0.73

Correlation Coefficient

Australian United  Rio Tinto

Poor diversification

The 3 months correlation between Australian and Rio is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Australian United Investment and Rio Tinto in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto and Australian United 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 Australian United Investment are associated (or correlated) with Rio Tinto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rio Tinto has no effect on the direction of Australian United i.e., Australian United and Rio Tinto go up and down completely randomly.

Pair Corralation between Australian United and Rio Tinto

Assuming the 90 days trading horizon Australian United Investment is expected to under-perform the Rio Tinto. But the stock apears to be less risky and, when comparing its historical volatility, Australian United Investment is 1.74 times less risky than Rio Tinto. The stock trades about -0.02 of its potential returns per unit of risk. The Rio Tinto is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  10,994  in Rio Tinto on August 31, 2024 and sell it today you would earn a total of  830.00  from holding Rio Tinto or generate 7.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Australian United Investment  vs.  Rio Tinto

Australian United

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Australian United Investment has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable forward indicators, Australian United is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Rio Tinto

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Australian United and Rio Tinto

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

The idea behind Australian United Investment and Rio Tinto 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.