Correlation Between BHP Group and Fortescue Metals

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

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

Diversification Opportunities for BHP Group and Fortescue Metals

0.05

Correlation Coefficient

BHP Group  Fortescue Metals

Significant diversification

The 3 months correlation between BHP and Fortescue is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding BHP Group Limited and Fortescue Metals Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fortescue Metals and BHP Group 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 BHP Group Limited 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 BHP Group i.e., BHP Group and Fortescue Metals go up and down completely randomly.

Pair Corralation between BHP Group and Fortescue Metals

Considering the 90-day investment horizon BHP Group Limited is expected to generate 0.59 times more return on investment than Fortescue Metals. However, BHP Group Limited is 1.7 times less risky than Fortescue Metals. It trades about 0.04 of its potential returns per unit of risk. Fortescue Metals Group is currently generating about -0.08 per unit of risk. If you would invest  4,782  in BHP Group Limited on December 28, 2024 and sell it today you would earn a total of  110.00  from holding BHP Group Limited or generate 2.3% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

BHP Group Limited  vs.  Fortescue Metals Group

BHP Group Limited

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BHP Group Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical indicators, BHP Group is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Fortescue Metals

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fortescue Metals Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with BHP Group and Fortescue Metals

The main advantage of trading using opposite BHP Group and Fortescue Metals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BHP Group 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 BHP Group Limited 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.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.