Correlation Between Rio Tinto and South32 ADR

Can any of the company-specific risk be diversified away by investing in both Rio Tinto and South32 ADR 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 South32 ADR 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 South32 ADR, you can compare the effects of market volatilities on Rio Tinto and South32 ADR 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 South32 ADR. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio Tinto and South32 ADR.

Diversification Opportunities for Rio Tinto and South32 ADR

0.44

Correlation Coefficient

Rio Tinto  South32 ADR

Very weak diversification

The 3 months correlation between Rio and South32 is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto Group and South32 ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on South32 ADR 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 South32 ADR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of South32 ADR has no effect on the direction of Rio Tinto i.e., Rio Tinto and South32 ADR go up and down completely randomly.

Pair Corralation between Rio Tinto and South32 ADR

Assuming the 90 days horizon Rio Tinto is expected to generate 1.36 times less return on investment than South32 ADR. But when comparing it to its historical volatility, Rio Tinto Group is 1.22 times less risky than South32 ADR. It trades about 0.09 of its potential returns per unit of risk. South32 ADR is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,095  in South32 ADR on November 27, 2024 and sell it today you would earn a total of  55.00  from holding South32 ADR or generate 5.02% return on investment over 90 days.

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

Rio Tinto Group  vs.  South32 ADR

Rio Tinto Group

Risk-Adjusted Performance

Insignificant

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

South32 ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days South32 ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical indicators, South32 ADR is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Rio Tinto and South32 ADR

The main advantage of trading using opposite Rio Tinto and South32 ADR positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rio Tinto position performs unexpectedly, South32 ADR 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 South32 ADR will offset losses from the drop in South32 ADR's long position.

The idea behind Rio Tinto Group and South32 ADR 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.