Correlation Between Kumba Iron and BHP Group

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

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

Diversification Opportunities for Kumba Iron and BHP Group

0.9

Correlation Coefficient

Kumba Iron  BHP Group

Almost no diversification

The 3 months correlation between Kumba and BHP is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Kumba Iron Ore 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 Kumba Iron 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 Kumba Iron Ore 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 Kumba Iron i.e., Kumba Iron and BHP Group go up and down completely randomly.

Pair Corralation between Kumba Iron and BHP Group

Assuming the 90 days trading horizon Kumba Iron Ore is expected to generate 1.68 times more return on investment than BHP Group. However, Kumba Iron is 1.68 times more volatile than BHP Group Limited. It trades about -0.02 of its potential returns per unit of risk. BHP Group Limited is currently generating about -0.08 per unit of risk. If you would invest  3,345,000  in Kumba Iron Ore on September 27, 2024 and sell it today you would lose (46,300) from holding Kumba Iron Ore or give up 1.38% of portfolio value over 90 days.

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

Kumba Iron Ore  vs.  BHP Group Limited

Kumba Iron Ore

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Kumba Iron Ore has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

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. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Kumba Iron and BHP Group

The main advantage of trading using opposite Kumba Iron and BHP Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Kumba Iron 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 Kumba Iron Ore 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 Transaction History module to view history of all your transactions and understand their impact on performance.