Correlation Between Vale SA and BHP Group

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

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

Diversification Opportunities for Vale SA and BHP Group

0.94

Correlation Coefficient

Vale SA  BHP Group

Almost no diversification

The 3 months correlation between Vale and BHP is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR 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 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 ADR 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 Vale SA i.e., Vale SA and BHP Group go up and down completely randomly.

Pair Corralation between Vale SA and BHP Group

Given the investment horizon of 90 days Vale SA ADR is expected to under-perform the BHP Group. In addition to that, Vale SA is 1.11 times more volatile than BHP Group Limited. It trades about 0.0 of its total potential returns per unit of risk. BHP Group Limited is currently generating about 0.04 per unit of volatility. If you would invest  5,090  in BHP Group Limited on September 1, 2024 and sell it today you would earn a total of  175.00  from holding BHP Group Limited or generate 3.44% return on investment over 90 days.

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

Vale SA ADR  vs.  BHP Group Limited

Vale SA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound essential indicators, Vale SA 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

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in BHP Group Limited are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical indicators, BHP Group is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Vale SA and BHP Group

The main advantage of trading using opposite Vale SA and BHP Group positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vale SA 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 Vale SA ADR 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.