Correlation Between Banco Do and Vale SA

Can any of the company-specific risk be diversified away by investing in both Banco Do and Vale SA 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 Banco Do and Vale SA into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Banco do Brasil and Vale SA, you can compare the effects of market volatilities on Banco Do and Vale SA 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 Banco Do with a short position of Vale SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of Banco Do and Vale SA.

Diversification Opportunities for Banco Do and Vale SA

0.74

Correlation Coefficient

Banco Do  Vale SA

Poor diversification

The 3 months correlation between Banco and Vale is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Banco do Brasil and Vale SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vale SA and Banco Do 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 Banco do Brasil are associated (or correlated) with Vale SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vale SA has no effect on the direction of Banco Do i.e., Banco Do and Vale SA go up and down completely randomly.

Pair Corralation between Banco Do and Vale SA

Assuming the 90 days trading horizon Banco do Brasil is expected to generate 0.98 times more return on investment than Vale SA. However, Banco do Brasil is 1.03 times less risky than Vale SA. It trades about 0.24 of its potential returns per unit of risk. Vale SA is currently generating about 0.12 per unit of risk. If you would invest  2,362  in Banco do Brasil on December 30, 2024 and sell it today you would earn a total of  502.00  from holding Banco do Brasil or generate 21.25% return on investment over 90 days.

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

Banco do Brasil  vs.  Vale SA

Banco do Brasil

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Banco do Brasil are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Banco Do unveiled solid returns over the last few months and may actually be approaching a breakup point.

Vale SA

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vale SA are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Vale SA may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Banco Do and Vale SA

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

The idea behind Banco do Brasil and Vale SA 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.