Correlation Between Fortescue Metals and Labrador Iron

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

Diversification Opportunities for Fortescue Metals and Labrador Iron

0.85

Correlation Coefficient

Fortescue Metals  Labrador Iron

Very poor diversification

The 3 months correlation between Fortescue and Labrador is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and Labrador Iron Ore in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Labrador Iron Ore 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 Labrador Iron. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Labrador Iron Ore has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and Labrador Iron go up and down completely randomly.

Pair Corralation between Fortescue Metals and Labrador Iron

Assuming the 90 days horizon Fortescue Metals Group is expected to under-perform the Labrador Iron. In addition to that, Fortescue Metals is 2.54 times more volatile than Labrador Iron Ore. It trades about -0.09 of its total potential returns per unit of risk. Labrador Iron Ore is currently generating about -0.17 per unit of volatility. If you would invest  2,105  in Labrador Iron Ore on October 3, 2024 and sell it today you would lose (94.00) from holding Labrador Iron Ore or give up 4.47% of portfolio value over 90 days.

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

Fortescue Metals Group  vs.  Labrador Iron Ore

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 weak performance in the last few months, the Stock's primary 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.

Labrador Iron Ore

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Labrador Iron Ore 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 basic 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.

Pair Trading with Fortescue Metals and Labrador Iron

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

The idea behind Fortescue Metals Group and Labrador Iron Ore 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.