Correlation Between Rio Tinto and Commonwealth Bank

Can any of the company-specific risk be diversified away by investing in both Rio Tinto and Commonwealth Bank 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 Rio Tinto and Commonwealth Bank into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Rio Tinto and Commonwealth Bank, you can compare the effects of market volatilities on Rio Tinto and Commonwealth Bank 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 Rio Tinto with a short position of Commonwealth Bank. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio Tinto and Commonwealth Bank.

Diversification Opportunities for Rio Tinto and Commonwealth Bank

-0.27

Correlation Coefficient

Rio Tinto  Commonwealth Bank

Very good diversification

The 3 months correlation between Rio and Commonwealth is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto and Commonwealth Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Commonwealth Bank and Rio Tinto 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 Rio Tinto are associated (or correlated) with Commonwealth Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Commonwealth Bank has no effect on the direction of Rio Tinto i.e., Rio Tinto and Commonwealth Bank go up and down completely randomly.

Pair Corralation between Rio Tinto and Commonwealth Bank

Assuming the 90 days trading horizon Rio Tinto is expected to generate 1.62 times less return on investment than Commonwealth Bank. In addition to that, Rio Tinto is 1.25 times more volatile than Commonwealth Bank. It trades about 0.07 of its total potential returns per unit of risk. Commonwealth Bank is currently generating about 0.14 per unit of volatility. If you would invest  14,177  in Commonwealth Bank on August 31, 2024 and sell it today you would earn a total of  1,681  from holding Commonwealth Bank or generate 11.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Rio Tinto  vs.  Commonwealth Bank

Rio Tinto

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Commonwealth Bank

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Commonwealth Bank are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Commonwealth Bank may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Rio Tinto and Commonwealth Bank

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

The idea behind Rio Tinto and Commonwealth Bank 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.