Correlation Between Vale SA and Federal Agricultural

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

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

Diversification Opportunities for Vale SA and Federal Agricultural

-0.05

Correlation Coefficient

Vale SA  Federal Agricultural

Good diversification

The 3 months correlation between Vale and Federal is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Federal Agricultural Mortgage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Agricultural and Vale SA 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 Vale SA are associated (or correlated) with Federal Agricultural. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Agricultural has no effect on the direction of Vale SA i.e., Vale SA and Federal Agricultural go up and down completely randomly.

Pair Corralation between Vale SA and Federal Agricultural

Assuming the 90 days trading horizon Vale SA is expected to under-perform the Federal Agricultural. But the stock apears to be less risky and, when comparing its historical volatility, Vale SA is 1.13 times less risky than Federal Agricultural. The stock trades about -0.08 of its potential returns per unit of risk. The Federal Agricultural Mortgage is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  16,981  in Federal Agricultural Mortgage on October 24, 2024 and sell it today you would earn a total of  1,719  from holding Federal Agricultural Mortgage or generate 10.12% return on investment over 90 days.

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

Vale SA  vs.  Federal Agricultural Mortgage

Vale SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's essential indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Federal Agricultural

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Agricultural Mortgage are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Federal Agricultural may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Vale SA and Federal Agricultural

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

The idea behind Vale SA and Federal Agricultural Mortgage 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.