Correlation Between Fortescue Metals and Rio Tinto

Can any of the company-specific risk be diversified away by investing in both Fortescue Metals 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 Fortescue Metals and Rio Tinto 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 Rio Tinto Group, you can compare the effects of market volatilities on Fortescue Metals 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 Fortescue Metals with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fortescue Metals and Rio Tinto.

Diversification Opportunities for Fortescue Metals and Rio Tinto

0.43

Correlation Coefficient

Fortescue Metals  Rio Tinto

Very weak diversification

The 3 months correlation between Fortescue and Rio is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and Rio Tinto Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto Group 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 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 Group has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and Rio Tinto go up and down completely randomly.

Pair Corralation between Fortescue Metals and Rio Tinto

Assuming the 90 days horizon Fortescue Metals Group is expected to generate 1.75 times more return on investment than Rio Tinto. However, Fortescue Metals is 1.75 times more volatile than Rio Tinto Group. It trades about 0.04 of its potential returns per unit of risk. Rio Tinto Group is currently generating about 0.02 per unit of risk. If you would invest  1,087  in Fortescue Metals Group on October 7, 2024 and sell it today you would earn a total of  73.00  from holding Fortescue Metals Group or generate 6.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	94.06%
Values	Daily Returns

Fortescue Metals Group  vs.  Rio Tinto Group

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.

Rio Tinto Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto Group 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 Rio Tinto

The main advantage of trading using opposite Fortescue Metals and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fortescue Metals 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 Fortescue Metals Group and Rio Tinto Group 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.