Correlation Between Rio Tinto and Lithium Power

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

Diversification Opportunities for Rio Tinto and Lithium Power

0.16

Correlation Coefficient

Rio Tinto  Lithium Power

Average diversification

The 3 months correlation between Rio and Lithium is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto ADR and Lithium Power International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithium Power Intern 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 Lithium Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lithium Power Intern has no effect on the direction of Rio Tinto i.e., Rio Tinto and Lithium Power go up and down completely randomly.

Pair Corralation between Rio Tinto and Lithium Power

Considering the 90-day investment horizon Rio Tinto ADR is expected to generate 0.26 times more return on investment than Lithium Power. However, Rio Tinto ADR is 3.87 times less risky than Lithium Power. It trades about -0.01 of its potential returns per unit of risk. Lithium Power International is currently generating about -0.02 per unit of risk. If you would invest  6,887  in Rio Tinto ADR on October 11, 2024 and sell it today you would lose (1,024) from holding Rio Tinto ADR or give up 14.87% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	25.86%
Values	Daily Returns

Rio Tinto ADR  vs.  Lithium Power International

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 unsteady performance in the last few months, the Stock's forward indicators remain very healthy which may send shares a bit higher in February 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Lithium Power Intern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lithium Power International has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical indicators, Lithium Power is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Rio Tinto and Lithium Power

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

The idea behind Rio Tinto ADR and Lithium Power International 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.