Correlation Between Rio2 and West African

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

By analyzing existing cross correlation between Rio2 Limited and West African Resources, you can compare the effects of market volatilities on Rio2 and West African 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 West African. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio2 and West African.

Diversification Opportunities for Rio2 and West African

0.24

Correlation Coefficient

Rio2  West African

Modest diversification

The 3 months correlation between Rio2 and West is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Rio2 Limited and West African Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on West African Resources 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 West African. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of West African Resources has no effect on the direction of Rio2 i.e., Rio2 and West African go up and down completely randomly.

Pair Corralation between Rio2 and West African

Assuming the 90 days horizon Rio2 Limited is expected to generate 0.76 times more return on investment than West African. However, Rio2 Limited is 1.31 times less risky than West African. It trades about -0.07 of its potential returns per unit of risk. West African Resources is currently generating about -0.21 per unit of risk. If you would invest  50.00  in Rio2 Limited on September 2, 2024 and sell it today you would lose (2.00) from holding Rio2 Limited or give up 4.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Rio2 Limited  vs.  West African Resources

Rio2 Limited

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rio2 Limited are ranked lower than 9 (%) 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.

West African Resources

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Rio2 and West African

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

The idea behind Rio2 Limited and West African Resources 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.