Correlation Between Rio Tinto and Sumitomo Metal

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

Diversification Opportunities for Rio Tinto and Sumitomo Metal

0.86

Correlation Coefficient

Rio Tinto  Sumitomo Metal

Very poor diversification

The 3 months correlation between Rio and Sumitomo is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto ADR and Sumitomo Metal Mining in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumitomo Metal Mining 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 Sumitomo Metal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumitomo Metal Mining has no effect on the direction of Rio Tinto i.e., Rio Tinto and Sumitomo Metal go up and down completely randomly.

Pair Corralation between Rio Tinto and Sumitomo Metal

Considering the 90-day investment horizon Rio Tinto ADR is expected to generate 0.67 times more return on investment than Sumitomo Metal. However, Rio Tinto ADR is 1.48 times less risky than Sumitomo Metal. It trades about -0.16 of its potential returns per unit of risk. Sumitomo Metal Mining is currently generating about -0.25 per unit of risk. If you would invest  6,983  in Rio Tinto ADR on September 3, 2024 and sell it today you would lose (699.00) from holding Rio Tinto ADR or give up 10.01% 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.  Sumitomo Metal Mining

Rio Tinto ADR

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. 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.

Sumitomo Metal Mining

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sumitomo Metal Mining has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Rio Tinto and Sumitomo Metal

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

The idea behind Rio Tinto ADR and Sumitomo Metal Mining 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.