Correlation Between Rio Tinto and STMicroelectronics

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

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

Diversification Opportunities for Rio Tinto and STMicroelectronics

0.36

Correlation Coefficient

Rio Tinto  STMicroelectronics

Weak diversification

The 3 months correlation between Rio and STMicroelectronics is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto PLC and STMicroelectronics NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics 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 PLC are associated (or correlated) with STMicroelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of STMicroelectronics has no effect on the direction of Rio Tinto i.e., Rio Tinto and STMicroelectronics go up and down completely randomly.

Pair Corralation between Rio Tinto and STMicroelectronics

Assuming the 90 days trading horizon Rio Tinto PLC is expected to generate 0.65 times more return on investment than STMicroelectronics. However, Rio Tinto PLC is 1.55 times less risky than STMicroelectronics. It trades about -0.03 of its potential returns per unit of risk. STMicroelectronics NV is currently generating about -0.09 per unit of risk. If you would invest  530,581  in Rio Tinto PLC on October 2, 2024 and sell it today you would lose (58,281) from holding Rio Tinto PLC or give up 10.98% of portfolio value over 90 days.

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

Rio Tinto PLC  vs.  STMicroelectronics NV

Rio Tinto PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

STMicroelectronics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days STMicroelectronics NV has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Rio Tinto and STMicroelectronics

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

The idea behind Rio Tinto PLC and STMicroelectronics NV 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.