Correlation Between Vale SA and MP Materials

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

Diversification Opportunities for Vale SA and MP Materials

0.46

Correlation Coefficient

Vale SA  MP Materials

Very weak diversification

The 3 months correlation between Vale and MP Materials is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR and MP Materials Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MP Materials Corp 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 MP Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MP Materials Corp has no effect on the direction of Vale SA i.e., Vale SA and MP Materials go up and down completely randomly.

Pair Corralation between Vale SA and MP Materials

Given the investment horizon of 90 days Vale SA is expected to generate 1.78 times less return on investment than MP Materials. But when comparing it to its historical volatility, Vale SA ADR is 2.31 times less risky than MP Materials. It trades about 0.24 of its potential returns per unit of risk. MP Materials Corp is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  2,152  in MP Materials Corp on November 28, 2024 and sell it today you would earn a total of  308.00  from holding MP Materials Corp or generate 14.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

Vale SA ADR  vs.  MP Materials Corp

Vale SA ADR

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Vale SA ADR are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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.

MP Materials Corp

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in MP Materials Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting basic indicators, MP Materials reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vale SA and MP Materials

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

The idea behind Vale SA ADR and MP Materials Corp 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.