Correlation Between Vale SA and Reliance Steel

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

By analyzing existing cross correlation between Vale SA and Reliance Steel Aluminum, you can compare the effects of market volatilities on Vale SA and Reliance Steel 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 Reliance Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vale SA and Reliance Steel.

Diversification Opportunities for Vale SA and Reliance Steel

0.7

Correlation Coefficient

Vale SA  Reliance Steel

Poor diversification

The 3 months correlation between Vale and Reliance is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Reliance Steel Aluminum in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reliance Steel Aluminum 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 Reliance Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reliance Steel Aluminum has no effect on the direction of Vale SA i.e., Vale SA and Reliance Steel go up and down completely randomly.

Pair Corralation between Vale SA and Reliance Steel

Assuming the 90 days trading horizon Vale SA is expected to generate 1.15 times more return on investment than Reliance Steel. However, Vale SA is 1.15 times more volatile than Reliance Steel Aluminum. It trades about 0.0 of its potential returns per unit of risk. Reliance Steel Aluminum is currently generating about -0.03 per unit of risk. If you would invest  898.00  in Vale SA on December 5, 2024 and sell it today you would lose (6.00) from holding Vale SA or give up 0.67% of portfolio value over 90 days.

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

Vale SA  vs.  Reliance Steel Aluminum

Vale SA

Risk-Adjusted Performance

Weak

Over the last 90 days Vale SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, Vale SA is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Reliance Steel Aluminum

Risk-Adjusted Performance

Very Weak

Over the last 90 days Reliance Steel Aluminum has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Reliance Steel is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Vale SA and Reliance Steel

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

The idea behind Vale SA and Reliance Steel Aluminum 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.