Correlation Between Rio2 and BTU Metals

Can any of the company-specific risk be diversified away by investing in both Rio2 and BTU 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 Rio2 and BTU Metals into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Rio2 Limited and BTU Metals Corp, you can compare the effects of market volatilities on Rio2 and BTU 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 Rio2 with a short position of BTU Metals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio2 and BTU Metals.

Diversification Opportunities for Rio2 and BTU Metals

0.33

Correlation Coefficient

Rio2  BTU Metals

Weak diversification

The 3 months correlation between Rio2 and BTU is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Rio2 Limited and BTU Metals Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BTU Metals Corp and Rio2 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 Rio2 Limited are associated (or correlated) with BTU Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BTU Metals Corp has no effect on the direction of Rio2 i.e., Rio2 and BTU Metals go up and down completely randomly.

Pair Corralation between Rio2 and BTU Metals

Assuming the 90 days horizon Rio2 is expected to generate 1.6 times less return on investment than BTU Metals. But when comparing it to its historical volatility, Rio2 Limited is 2.26 times less risky than BTU Metals. It trades about 0.08 of its potential returns per unit of risk. BTU Metals Corp is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1.38  in BTU Metals Corp on November 20, 2024 and sell it today you would earn a total of  0.89  from holding BTU Metals Corp or generate 64.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.97%
Values	Daily Returns

Rio2 Limited  vs.  BTU Metals Corp

Rio2 Limited

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio2 Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Rio2 reported solid returns over the last few months and may actually be approaching a breakup point.

BTU Metals Corp

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BTU Metals Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak primary indicators, BTU Metals reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio2 and BTU Metals

The main advantage of trading using opposite Rio2 and BTU Metals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rio2 position performs unexpectedly, BTU 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 BTU Metals will offset losses from the drop in BTU Metals' long position.

The idea behind Rio2 Limited and BTU Metals Corp 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.