Correlation Between Rio Tinto and Derwent London

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

Diversification Opportunities for Rio Tinto and Derwent London

-0.13

Correlation Coefficient

Rio Tinto  Derwent London

Good diversification

The 3 months correlation between Rio and Derwent is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto PLC and Derwent London PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Derwent London PLC 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 Derwent London. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Derwent London PLC has no effect on the direction of Rio Tinto i.e., Rio Tinto and Derwent London go up and down completely randomly.

Pair Corralation between Rio Tinto and Derwent London

Assuming the 90 days trading horizon Rio Tinto PLC is expected to generate 0.83 times more return on investment than Derwent London. However, Rio Tinto PLC is 1.2 times less risky than Derwent London. It trades about 0.11 of its potential returns per unit of risk. Derwent London PLC is currently generating about -0.08 per unit of risk. If you would invest  452,708  in Rio Tinto PLC on December 27, 2024 and sell it today you would earn a total of  35,242  from holding Rio Tinto PLC or generate 7.78% return on investment over 90 days.

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

Rio Tinto PLC  vs.  Derwent London PLC

Rio Tinto PLC

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting technical and fundamental indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Derwent London PLC

Risk-Adjusted Performance

Very Weak

Over the last 90 days Derwent London 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.

Pair Trading with Rio Tinto and Derwent London

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

The idea behind Rio Tinto PLC and Derwent London PLC 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.