Correlation Between Challenger and Rio Tinto

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

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

Diversification Opportunities for Challenger and Rio Tinto

-0.24

Correlation Coefficient

Challenger  Rio Tinto

Very good diversification

The 3 months correlation between Challenger and Rio is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Challenger and Rio Tinto in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto and Challenger 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 Challenger 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 Challenger i.e., Challenger and Rio Tinto go up and down completely randomly.

Pair Corralation between Challenger and Rio Tinto

Assuming the 90 days trading horizon Challenger is expected to generate 1.4 times less return on investment than Rio Tinto. In addition to that, Challenger is 1.6 times more volatile than Rio Tinto. It trades about 0.03 of its total potential returns per unit of risk. Rio Tinto is currently generating about 0.08 per unit of volatility. If you would invest  11,432  in Rio Tinto on December 30, 2024 and sell it today you would earn a total of  694.00  from holding Rio Tinto or generate 6.07% return on investment over 90 days.

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

Challenger  vs.  Rio Tinto

Challenger

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Challenger are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical and fundamental indicators, Challenger 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

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto are ranked lower than 5 (%) 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 April 2025.

Pair Trading with Challenger and Rio Tinto

The main advantage of trading using opposite Challenger and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Challenger 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 Challenger 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.

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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.