Correlation Between Vale SA and Fortescue Metals

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

Diversification Opportunities for Vale SA and Fortescue Metals

0.24

Correlation Coefficient

Vale SA  Fortescue Metals

Modest diversification

The 3 months correlation between Vale and Fortescue is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Fortescue Metals Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fortescue 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 Fortescue Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fortescue Metals has no effect on the direction of Vale SA i.e., Vale SA and Fortescue Metals go up and down completely randomly.

Pair Corralation between Vale SA and Fortescue Metals

Assuming the 90 days trading horizon Vale SA is expected to under-perform the Fortescue Metals. But the stock apears to be less risky and, when comparing its historical volatility, Vale SA is 1.31 times less risky than Fortescue Metals. The stock trades about -0.15 of its potential returns per unit of risk. The Fortescue Metals Group is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  1,162  in Fortescue Metals Group on October 6, 2024 and sell it today you would lose (45.00) from holding Fortescue Metals Group or give up 3.87% of portfolio value over 90 days.

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

Vale SA  vs.  Fortescue Metals Group

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 fragile performance in the last few months, the Stock's essential indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Fortescue Metals

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Vale SA and Fortescue Metals

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

The idea behind Vale SA and Fortescue Metals Group 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.