Correlation Between Vale SA and Sovereign Metals

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

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

Diversification Opportunities for Vale SA and Sovereign Metals

-0.2

Correlation Coefficient

Vale SA  Sovereign Metals

Good diversification

The 3 months correlation between Vale and Sovereign is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Sovereign Metals Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sovereign Metals 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 Sovereign Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sovereign Metals has no effect on the direction of Vale SA i.e., Vale SA and Sovereign Metals go up and down completely randomly.

Pair Corralation between Vale SA and Sovereign Metals

Assuming the 90 days trading horizon Vale SA is expected to generate 124.53 times less return on investment than Sovereign Metals. But when comparing it to its historical volatility, Vale SA is 1.37 times less risky than Sovereign Metals. It trades about 0.0 of its potential returns per unit of risk. Sovereign Metals Limited is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  38.00  in Sovereign Metals Limited on September 14, 2024 and sell it today you would earn a total of  11.00  from holding Sovereign Metals Limited or generate 28.95% 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.  Sovereign Metals Limited

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 nearly stable essential indicators, Vale SA is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Sovereign Metals

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sovereign Metals Limited are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Sovereign Metals reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vale SA and Sovereign Metals

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

The idea behind Vale SA and Sovereign Metals Limited 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.