Correlation Between Sigma Lithium and Rio Tinto

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

By analyzing existing cross correlation between Sigma Lithium Resources and Rio Tinto ADR, you can compare the effects of market volatilities on Sigma Lithium and Rio Tinto 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 Sigma Lithium with a short position of Rio Tinto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sigma Lithium and Rio Tinto.

Diversification Opportunities for Sigma Lithium and Rio Tinto

0.29

Correlation Coefficient

Sigma Lithium  Rio Tinto

Modest diversification

The 3 months correlation between Sigma and Rio is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Sigma Lithium Resources and Rio Tinto ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto ADR and Sigma Lithium 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 Sigma Lithium Resources are associated (or correlated) with Rio Tinto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rio Tinto ADR has no effect on the direction of Sigma Lithium i.e., Sigma Lithium and Rio Tinto go up and down completely randomly.

Pair Corralation between Sigma Lithium and Rio Tinto

Given the investment horizon of 90 days Sigma Lithium Resources is expected to under-perform the Rio Tinto. In addition to that, Sigma Lithium is 2.18 times more volatile than Rio Tinto ADR. It trades about -0.08 of its total potential returns per unit of risk. Rio Tinto ADR is currently generating about -0.05 per unit of volatility. If you would invest  6,327  in Rio Tinto ADR on December 1, 2024 and sell it today you would lose (271.00) from holding Rio Tinto ADR or give up 4.28% of portfolio value over 90 days.

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

Sigma Lithium Resources  vs.  Rio Tinto ADR

Sigma Lithium Resources

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sigma Lithium Resources has generated negative risk-adjusted returns adding no value to investors with long positions. Despite conflicting performance in the last few months, the Stock's primary indicators remain quite persistent which may send shares a bit higher in April 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Rio Tinto ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rio Tinto ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Rio Tinto is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Sigma Lithium and Rio Tinto

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

The idea behind Sigma Lithium Resources and Rio Tinto 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.