Correlation Between Rio Tinto and Huntsman Exploration

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

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

Diversification Opportunities for Rio Tinto and Huntsman Exploration

0.5

Correlation Coefficient

Rio Tinto  Huntsman Exploration

Very weak diversification

The 3 months correlation between Rio and Huntsman is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto ADR and Huntsman Exploration in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Huntsman Exploration 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 ADR are associated (or correlated) with Huntsman Exploration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Huntsman Exploration has no effect on the direction of Rio Tinto i.e., Rio Tinto and Huntsman Exploration go up and down completely randomly.

Pair Corralation between Rio Tinto and Huntsman Exploration

Considering the 90-day investment horizon Rio Tinto ADR is expected to under-perform the Huntsman Exploration. But the stock apears to be less risky and, when comparing its historical volatility, Rio Tinto ADR is 13.0 times less risky than Huntsman Exploration. The stock trades about -0.02 of its potential returns per unit of risk. The Huntsman Exploration is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  3.70  in Huntsman Exploration on November 29, 2024 and sell it today you would earn a total of  1.10  from holding Huntsman Exploration or generate 29.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.33%
Values	Daily Returns

Rio Tinto ADR  vs.  Huntsman Exploration

Rio Tinto ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rio Tinto ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Rio Tinto is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Huntsman Exploration

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Huntsman Exploration are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, Huntsman Exploration reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio Tinto and Huntsman Exploration

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

The idea behind Rio Tinto ADR and Huntsman Exploration 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.