Correlation Between Rio Tinto and Alphabet

Can any of the company-specific risk be diversified away by investing in both Rio Tinto and Alphabet 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 Alphabet 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 Alphabet Class A, you can compare the effects of market volatilities on Rio Tinto and Alphabet 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 Alphabet. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio Tinto and Alphabet.

Diversification Opportunities for Rio Tinto and Alphabet

-0.44

Correlation Coefficient

Rio Tinto  Alphabet

Very good diversification

The 3 months correlation between Rio and Alphabet is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto PLC and Alphabet Class A in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alphabet Class A 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 Alphabet. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alphabet Class A has no effect on the direction of Rio Tinto i.e., Rio Tinto and Alphabet go up and down completely randomly.

Pair Corralation between Rio Tinto and Alphabet

Assuming the 90 days trading horizon Rio Tinto PLC is expected to under-perform the Alphabet. But the stock apears to be less risky and, when comparing its historical volatility, Rio Tinto PLC is 1.35 times less risky than Alphabet. The stock trades about -0.05 of its potential returns per unit of risk. The Alphabet Class A is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  16,670  in Alphabet Class A on September 24, 2024 and sell it today you would earn a total of  2,410  from holding Alphabet Class A or generate 14.46% return on investment over 90 days.

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

Rio Tinto PLC  vs.  Alphabet Class A

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 uncertain 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.

Alphabet Class A

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alphabet Class A are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Alphabet unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio Tinto and Alphabet

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

The idea behind Rio Tinto PLC and Alphabet Class A 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.