Correlation Between Sovereign Metals and Rio Tinto

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

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

Diversification Opportunities for Sovereign Metals and Rio Tinto

0.47

Correlation Coefficient

Sovereign Metals  Rio Tinto

Very weak diversification

The 3 months correlation between Sovereign and Rio is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Sovereign Metals Limited and Rio Tinto Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto Group and Sovereign Metals 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 Sovereign Metals Limited 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 Group has no effect on the direction of Sovereign Metals i.e., Sovereign Metals and Rio Tinto go up and down completely randomly.

Pair Corralation between Sovereign Metals and Rio Tinto

Assuming the 90 days horizon Sovereign Metals Limited is expected to generate 1.63 times more return on investment than Rio Tinto. However, Sovereign Metals is 1.63 times more volatile than Rio Tinto Group. It trades about 0.16 of its potential returns per unit of risk. Rio Tinto Group is currently generating about 0.08 per unit of risk. If you would invest  44.00  in Sovereign Metals Limited on December 23, 2024 and sell it today you would earn a total of  12.00  from holding Sovereign Metals Limited or generate 27.27% return on investment over 90 days.

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

Sovereign Metals Limited  vs.  Rio Tinto Group

Sovereign Metals

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sovereign Metals Limited are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Sovereign Metals reported solid returns over the last few months and may actually be approaching a breakup point.

Rio Tinto Group

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto Group are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Sovereign Metals and Rio Tinto

The main advantage of trading using opposite Sovereign Metals and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sovereign Metals 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 Sovereign Metals Limited and Rio Tinto 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.