Correlation Between BHP Group and Sumitomo Metal

Can any of the company-specific risk be diversified away by investing in both BHP Group and Sumitomo Metal 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 Sumitomo Metal 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 Sumitomo Metal Mining, you can compare the effects of market volatilities on BHP Group and Sumitomo Metal 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 Sumitomo Metal. Check out your portfolio center. Please also check ongoing floating volatility patterns of BHP Group and Sumitomo Metal.

Diversification Opportunities for BHP Group and Sumitomo Metal

0.69

Correlation Coefficient

BHP Group  Sumitomo Metal

Poor diversification

The 3 months correlation between BHP and Sumitomo is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding BHP Group Limited and Sumitomo Metal Mining in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumitomo Metal Mining 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 Sumitomo Metal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumitomo Metal Mining has no effect on the direction of BHP Group i.e., BHP Group and Sumitomo Metal go up and down completely randomly.

Pair Corralation between BHP Group and Sumitomo Metal

Assuming the 90 days horizon BHP Group Limited is expected to generate 2.18 times more return on investment than Sumitomo Metal. However, BHP Group is 2.18 times more volatile than Sumitomo Metal Mining. It trades about 0.08 of its potential returns per unit of risk. Sumitomo Metal Mining is currently generating about -0.05 per unit of risk. If you would invest  2,320  in BHP Group Limited on September 3, 2024 and sell it today you would earn a total of  457.00  from holding BHP Group Limited or generate 19.7% return on investment over 90 days.

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

BHP Group Limited  vs.  Sumitomo Metal Mining

BHP Group Limited

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BHP Group Limited are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak essential indicators, BHP Group reported solid returns over the last few months and may actually be approaching a breakup point.

Sumitomo Metal Mining

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sumitomo Metal Mining has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic 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 Sumitomo Metal

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

The idea behind BHP Group Limited and Sumitomo Metal Mining 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.