Correlation Between South32 and BHP Group

Can any of the company-specific risk be diversified away by investing in both South32 and BHP Group 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 South32 and BHP Group into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between South32 and BHP Group Limited, you can compare the effects of market volatilities on South32 and BHP Group 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 South32 with a short position of BHP Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of South32 and BHP Group.

Diversification Opportunities for South32 and BHP Group

0.5

Correlation Coefficient

South32  BHP Group

Very weak diversification

The 3 months correlation between South32 and BHP is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding South32 and BHP Group Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BHP Group Limited and South32 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 South32 are associated (or correlated) with BHP Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BHP Group Limited has no effect on the direction of South32 i.e., South32 and BHP Group go up and down completely randomly.

Pair Corralation between South32 and BHP Group

Assuming the 90 days trading horizon South32 is expected to generate 1.35 times more return on investment than BHP Group. However, South32 is 1.35 times more volatile than BHP Group Limited. It trades about -0.04 of its potential returns per unit of risk. BHP Group Limited is currently generating about -0.13 per unit of risk. If you would invest  418,700  in South32 on September 26, 2024 and sell it today you would lose (24,700) from holding South32 or give up 5.9% of portfolio value over 90 days.

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

South32  vs.  BHP Group Limited

South32

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days South32 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, South32 is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

BHP Group Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BHP Group Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with South32 and BHP Group

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

The idea behind South32 and BHP Group Limited 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.