Correlation Between Derwent London and Rio Tinto

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

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

Diversification Opportunities for Derwent London and Rio Tinto

-0.22

Correlation Coefficient

Derwent London  Rio Tinto

Very good diversification

The 3 months correlation between Derwent and Rio is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Derwent London PLC and Rio Tinto PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto PLC and Derwent London 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 Derwent London PLC 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 PLC has no effect on the direction of Derwent London i.e., Derwent London and Rio Tinto go up and down completely randomly.

Pair Corralation between Derwent London and Rio Tinto

Assuming the 90 days trading horizon Derwent London PLC is expected to under-perform the Rio Tinto. In addition to that, Derwent London is 1.2 times more volatile than Rio Tinto PLC. It trades about -0.08 of its total potential returns per unit of risk. Rio Tinto PLC is currently generating about 0.11 per unit of volatility. If you would invest  452,708  in Rio Tinto PLC on December 27, 2024 and sell it today you would earn a total of  35,242  from holding Rio Tinto PLC or generate 7.78% return on investment over 90 days.

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

Derwent London PLC  vs.  Rio Tinto PLC

Derwent London PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Derwent London PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Rio Tinto PLC

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting technical and fundamental indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Derwent London and Rio Tinto

The main advantage of trading using opposite Derwent London and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Derwent London 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 Derwent London PLC and Rio Tinto PLC 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.