Correlation Between Europa Metals and South32

Can any of the company-specific risk be diversified away by investing in both Europa Metals and South32 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 Europa Metals and South32 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Europa Metals and South32, you can compare the effects of market volatilities on Europa Metals and South32 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 Europa Metals with a short position of South32. Check out your portfolio center. Please also check ongoing floating volatility patterns of Europa Metals and South32.

Diversification Opportunities for Europa Metals and South32

0.06

Correlation Coefficient

Europa Metals  South32

Significant diversification

The 3 months correlation between Europa and South32 is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Europa Metals and South32 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on South32 and Europa Metals 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 Europa Metals are associated (or correlated) with South32. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of South32 has no effect on the direction of Europa Metals i.e., Europa Metals and South32 go up and down completely randomly.

Pair Corralation between Europa Metals and South32

Assuming the 90 days trading horizon Europa Metals is expected to generate 4.34 times more return on investment than South32. However, Europa Metals is 4.34 times more volatile than South32. It trades about 0.03 of its potential returns per unit of risk. South32 is currently generating about 0.01 per unit of risk. If you would invest  7,000  in Europa Metals on September 14, 2024 and sell it today you would lose (1,600) from holding Europa Metals or give up 22.86% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.63%
Values	Daily Returns

Europa Metals  vs.  South32

Europa Metals

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Europa Metals are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Europa Metals exhibited solid returns over the last few months and may actually be approaching a breakup point.

South32

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in South32 are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, South32 is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Europa Metals and South32

The main advantage of trading using opposite Europa Metals and South32 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Europa Metals position performs unexpectedly, South32 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 South32 will offset losses from the drop in South32's long position.

The idea behind Europa Metals and South32 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.