Correlation Between Fortescue Metals and BHP Group

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

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

Diversification Opportunities for Fortescue Metals and BHP Group

0.83

Correlation Coefficient

Fortescue Metals  BHP Group

Very poor diversification

The 3 months correlation between Fortescue and BHP is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and BHP Group Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BHP Group Limited and Fortescue 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 Fortescue Metals Group are associated (or correlated) with BHP Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BHP Group Limited has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and BHP Group go up and down completely randomly.

Pair Corralation between Fortescue Metals and BHP Group

Assuming the 90 days horizon Fortescue Metals Group is expected to generate 1.7 times more return on investment than BHP Group. However, Fortescue Metals is 1.7 times more volatile than BHP Group Limited. It trades about 0.07 of its potential returns per unit of risk. BHP Group Limited is currently generating about -0.02 per unit of risk. If you would invest  1,200  in Fortescue Metals Group on September 15, 2024 and sell it today you would earn a total of  40.00  from holding Fortescue Metals Group or generate 3.33% return on investment over 90 days.

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

Fortescue Metals Group  vs.  BHP Group Limited

Fortescue Metals

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Fortescue Metals Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, Fortescue Metals may actually be approaching a critical reversion point that can send shares even higher in January 2025.

BHP Group Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BHP Group Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical indicators, BHP Group is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Fortescue Metals and BHP Group

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

The idea behind Fortescue Metals Group and BHP Group 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.