Correlation Between Fortescue Metals and Galp Energia

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

Diversification Opportunities for Fortescue Metals and Galp Energia

0.68

Correlation Coefficient

Fortescue Metals  Galp Energia

Poor diversification

The 3 months correlation between Fortescue and Galp is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and Galp Energia SGPS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Galp Energia SGPS 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 Galp Energia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Galp Energia SGPS has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and Galp Energia go up and down completely randomly.

Pair Corralation between Fortescue Metals and Galp Energia

Assuming the 90 days horizon Fortescue Metals Group is expected to under-perform the Galp Energia. In addition to that, Fortescue Metals is 1.05 times more volatile than Galp Energia SGPS. It trades about -0.07 of its total potential returns per unit of risk. Galp Energia SGPS is currently generating about -0.05 per unit of volatility. If you would invest  1,644  in Galp Energia SGPS on December 21, 2024 and sell it today you would lose (111.00) from holding Galp Energia SGPS or give up 6.75% of portfolio value over 90 days.

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

Fortescue Metals Group  vs.  Galp Energia SGPS

Fortescue Metals

Risk-Adjusted Performance

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 latest unsteady performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Galp Energia SGPS

Risk-Adjusted Performance

Very Weak

Over the last 90 days Galp Energia SGPS has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Fortescue Metals and Galp Energia

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

The idea behind Fortescue Metals Group and Galp Energia SGPS 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.