Correlation Between Vale SA and Compania

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

By analyzing existing cross correlation between Vale SA and Compania de Transporte, you can compare the effects of market volatilities on Vale SA and Compania 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 Vale SA with a short position of Compania. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vale SA and Compania.

Diversification Opportunities for Vale SA and Compania

-0.59

Correlation Coefficient

Vale SA  Compania

Excellent diversification

The 3 months correlation between Vale and Compania is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Compania de Transporte in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Compania de Transporte and Vale SA 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 Vale SA are associated (or correlated) with Compania. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Compania de Transporte has no effect on the direction of Vale SA i.e., Vale SA and Compania go up and down completely randomly.

Pair Corralation between Vale SA and Compania

Assuming the 90 days trading horizon Vale SA is expected to generate 0.37 times more return on investment than Compania. However, Vale SA is 2.67 times less risky than Compania. It trades about -0.03 of its potential returns per unit of risk. Compania de Transporte is currently generating about -0.13 per unit of risk. If you would invest  532,000  in Vale SA on October 27, 2024 and sell it today you would lose (5,000) from holding Vale SA or give up 0.94% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

Vale SA  vs.  Compania de Transporte

Vale SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Compania de Transporte

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Compania de Transporte are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Compania sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vale SA and Compania

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

The idea behind Vale SA and Compania de Transporte 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.