Correlation Between Vale SA and Erdene Resource

Can any of the company-specific risk be diversified away by investing in both Vale SA and Erdene Resource 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 Erdene Resource 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 Erdene Resource Development, you can compare the effects of market volatilities on Vale SA and Erdene Resource 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 Erdene Resource. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vale SA and Erdene Resource.

Diversification Opportunities for Vale SA and Erdene Resource

0.86

Correlation Coefficient

Vale SA  Erdene Resource

Very poor diversification

The 3 months correlation between Vale and Erdene is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR and Erdene Resource Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Erdene Resource Deve 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 Erdene Resource. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Erdene Resource Deve has no effect on the direction of Vale SA i.e., Vale SA and Erdene Resource go up and down completely randomly.

Pair Corralation between Vale SA and Erdene Resource

Given the investment horizon of 90 days Vale SA ADR is expected to generate 0.48 times more return on investment than Erdene Resource. However, Vale SA ADR is 2.1 times less risky than Erdene Resource. It trades about -0.2 of its potential returns per unit of risk. Erdene Resource Development is currently generating about -0.1 per unit of risk. If you would invest  1,135  in Vale SA ADR on October 4, 2024 and sell it today you would lose (247.50) from holding Vale SA ADR or give up 21.81% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Vale SA ADR  vs.  Erdene Resource Development

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 weak performance in the last few months, the Stock's essential indicators remain rather sound which may send shares a bit higher in February 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Erdene Resource Deve

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Erdene Resource Development has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's fundamental indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Vale SA and Erdene Resource

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

The idea behind Vale SA ADR and Erdene Resource Development 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.