Correlation Between Rio Tinto and Fortescue Metals

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

Diversification Opportunities for Rio Tinto and Fortescue Metals

0.26

Correlation Coefficient

Rio Tinto  Fortescue Metals

Modest diversification

The 3 months correlation between Rio and Fortescue is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto Group and Fortescue Metals Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fortescue Metals 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 Fortescue Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fortescue Metals has no effect on the direction of Rio Tinto i.e., Rio Tinto and Fortescue Metals go up and down completely randomly.

Pair Corralation between Rio Tinto and Fortescue Metals

Assuming the 90 days horizon Rio Tinto Group is expected to generate 1.11 times more return on investment than Fortescue Metals. However, Rio Tinto is 1.11 times more volatile than Fortescue Metals Group. It trades about -0.01 of its potential returns per unit of risk. Fortescue Metals Group is currently generating about -0.12 per unit of risk. If you would invest  6,143  in Rio Tinto Group on December 1, 2024 and sell it today you would lose (111.00) from holding Rio Tinto Group or give up 1.81% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	73.33%
Values	Daily Returns

Rio Tinto Group  vs.  Fortescue Metals Group

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.

Fortescue Metals

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fortescue Metals Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's technical and fundamental indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Rio Tinto and Fortescue Metals

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

The idea behind Rio Tinto Group and Fortescue Metals Group 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.