Correlation Between Rio Tinto and Spotify Technology

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

Diversification Opportunities for Rio Tinto and Spotify Technology

0.61

Correlation Coefficient

Rio Tinto  Spotify Technology

Poor diversification

The 3 months correlation between Rio and Spotify is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto PLC and Spotify Technology SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Spotify Technology 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 Spotify Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Spotify Technology has no effect on the direction of Rio Tinto i.e., Rio Tinto and Spotify Technology go up and down completely randomly.

Pair Corralation between Rio Tinto and Spotify Technology

Assuming the 90 days trading horizon Rio Tinto is expected to generate 4.94 times less return on investment than Spotify Technology. But when comparing it to its historical volatility, Rio Tinto PLC is 2.69 times less risky than Spotify Technology. It trades about 0.08 of its potential returns per unit of risk. Spotify Technology SA is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  43,595  in Spotify Technology SA on December 22, 2024 and sell it today you would earn a total of  11,695  from holding Spotify Technology SA or generate 26.83% return on investment over 90 days.

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

Rio Tinto PLC  vs.  Spotify Technology SA

Rio Tinto PLC

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto PLC are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Rio Tinto is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Spotify Technology

Risk-Adjusted Performance

OK

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

Pair Trading with Rio Tinto and Spotify Technology

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

The idea behind Rio Tinto PLC and Spotify Technology SA 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.