Correlation Between Decade Resources and Rio Tinto

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

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

Diversification Opportunities for Decade Resources and Rio Tinto

0.81

Correlation Coefficient

Decade Resources  Rio Tinto

Very poor diversification

The 3 months correlation between Decade and Rio is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Decade Resources and Rio Tinto ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto ADR and Decade Resources 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 Decade Resources 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 ADR has no effect on the direction of Decade Resources i.e., Decade Resources and Rio Tinto go up and down completely randomly.

Pair Corralation between Decade Resources and Rio Tinto

Assuming the 90 days horizon Decade Resources is expected to generate 19.95 times more return on investment than Rio Tinto. However, Decade Resources is 19.95 times more volatile than Rio Tinto ADR. It trades about 0.11 of its potential returns per unit of risk. Rio Tinto ADR is currently generating about 0.25 per unit of risk. If you would invest  2.50  in Decade Resources on October 26, 2024 and sell it today you would earn a total of  0.30  from holding Decade Resources or generate 12.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	90.0%
Values	Daily Returns

Decade Resources  vs.  Rio Tinto ADR

Decade Resources

Risk-Adjusted Performance

0 of 100

Very Weak

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

Rio Tinto ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's forward indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Decade Resources and Rio Tinto

The main advantage of trading using opposite Decade Resources and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Decade Resources 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 Decade Resources and Rio Tinto ADR 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.