Correlation Between Rio Tinto and Challenger

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

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

Diversification Opportunities for Rio Tinto and Challenger

-0.26

Correlation Coefficient

Rio Tinto  Challenger

Very good diversification

The 3 months correlation between Rio and Challenger is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto and Challenger in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Challenger 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 Challenger. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Challenger has no effect on the direction of Rio Tinto i.e., Rio Tinto and Challenger go up and down completely randomly.

Pair Corralation between Rio Tinto and Challenger

Assuming the 90 days trading horizon Rio Tinto is expected to under-perform the Challenger. But the stock apears to be less risky and, when comparing its historical volatility, Rio Tinto is 1.44 times less risky than Challenger. The stock trades about -0.05 of its potential returns per unit of risk. The Challenger is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  597.00  in Challenger on December 1, 2024 and sell it today you would lose (15.00) from holding Challenger or give up 2.51% of portfolio value over 90 days.

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

Rio Tinto  vs.  Challenger

Rio Tinto

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rio Tinto has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Rio Tinto is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Challenger

Risk-Adjusted Performance

Very Weak

Over the last 90 days Challenger has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical and fundamental indicators, Challenger is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Rio Tinto and Challenger

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

The idea behind Rio Tinto and Challenger 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.