Correlation Between Rio Tinto and UMC Electronics

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

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

Diversification Opportunities for Rio Tinto and UMC Electronics

0.31

Correlation Coefficient

Rio Tinto  UMC Electronics

Weak diversification

The 3 months correlation between Rio and UMC is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto Group and UMC Electronics Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UMC Electronics 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 Group are associated (or correlated) with UMC Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UMC Electronics has no effect on the direction of Rio Tinto i.e., Rio Tinto and UMC Electronics go up and down completely randomly.

Pair Corralation between Rio Tinto and UMC Electronics

Assuming the 90 days trading horizon Rio Tinto Group is expected to under-perform the UMC Electronics. But the stock apears to be less risky and, when comparing its historical volatility, Rio Tinto Group is 2.21 times less risky than UMC Electronics. The stock trades about -0.02 of its potential returns per unit of risk. The UMC Electronics Co is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  189.00  in UMC Electronics Co on December 1, 2024 and sell it today you would lose (2.00) from holding UMC Electronics Co or give up 1.06% of portfolio value over 90 days.

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

Rio Tinto Group  vs.  UMC Electronics Co

Rio Tinto Group

Risk-Adjusted Performance

Very Weak

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

UMC Electronics

Risk-Adjusted Performance

Weak

Over the last 90 days UMC Electronics Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, UMC Electronics 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 UMC Electronics

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

The idea behind Rio Tinto Group and UMC Electronics Co 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.