Correlation Between Rio Tinto and Fortescue Metals

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

Diversification Opportunities for Rio Tinto and Fortescue Metals

0.85

Correlation Coefficient

Rio Tinto  Fortescue Metals

Very poor diversification

The 3 months correlation between Rio and Fortescue is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto ADR and Fortescue Metals Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fortescue Metals 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 Fortescue Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fortescue Metals has no effect on the direction of Rio Tinto i.e., Rio Tinto and Fortescue Metals go up and down completely randomly.

Pair Corralation between Rio Tinto and Fortescue Metals

Considering the 90-day investment horizon Rio Tinto ADR is expected to generate 0.37 times more return on investment than Fortescue Metals. However, Rio Tinto ADR is 2.69 times less risky than Fortescue Metals. It trades about -0.01 of its potential returns per unit of risk. Fortescue Metals Group is currently generating about -0.02 per unit of risk. If you would invest  6,413  in Rio Tinto ADR on September 15, 2024 and sell it today you would lose (192.00) from holding Rio Tinto ADR or give up 2.99% of portfolio value over 90 days.

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

Rio Tinto ADR  vs.  Fortescue Metals Group

Rio Tinto ADR

Risk-Adjusted Performance

0 of 100

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.

Fortescue Metals

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Fortescue Metals Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, Fortescue Metals may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Rio Tinto and Fortescue Metals

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

The idea behind Rio Tinto ADR and Fortescue Metals Group 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.