Correlation Between Vale Indonesia and Indika Energy

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

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

Diversification Opportunities for Vale Indonesia and Indika Energy

0.89

Correlation Coefficient

Vale Indonesia  Indika Energy

Very poor diversification

The 3 months correlation between Vale and Indika is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Vale Indonesia Tbk and Indika Energy Tbk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Indika Energy Tbk and Vale Indonesia 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 Vale Indonesia Tbk are associated (or correlated) with Indika Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Indika Energy Tbk has no effect on the direction of Vale Indonesia i.e., Vale Indonesia and Indika Energy go up and down completely randomly.

Pair Corralation between Vale Indonesia and Indika Energy

Assuming the 90 days trading horizon Vale Indonesia Tbk is expected to generate 0.63 times more return on investment than Indika Energy. However, Vale Indonesia Tbk is 1.59 times less risky than Indika Energy. It trades about -0.04 of its potential returns per unit of risk. Indika Energy Tbk is currently generating about -0.04 per unit of risk. If you would invest  380,000  in Vale Indonesia Tbk on August 31, 2024 and sell it today you would lose (20,000) from holding Vale Indonesia Tbk or give up 5.26% of portfolio value over 90 days.

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

Vale Indonesia Tbk  vs.  Indika Energy Tbk

Vale Indonesia Tbk

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale Indonesia Tbk has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent forward-looking signals, Vale Indonesia is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Indika Energy Tbk

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Indika Energy Tbk has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest conflicting performance, the Stock's forward-looking signals remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with Vale Indonesia and Indika Energy

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

The idea behind Vale Indonesia Tbk and Indika Energy Tbk 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.