Correlation Between United States and Rio Tinto

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

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

Diversification Opportunities for United States and Rio Tinto

0.7

Correlation Coefficient

United States  Rio Tinto

Poor diversification

The 3 months correlation between United and Rio is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding United States Steel and Rio Tinto PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto PLC and United States 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 United States Steel 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 PLC has no effect on the direction of United States i.e., United States and Rio Tinto go up and down completely randomly.

Pair Corralation between United States and Rio Tinto

Given the investment horizon of 90 days United States Steel is expected to generate 2.09 times more return on investment than Rio Tinto. However, United States is 2.09 times more volatile than Rio Tinto PLC. It trades about 0.01 of its potential returns per unit of risk. Rio Tinto PLC is currently generating about -0.04 per unit of risk. If you would invest  1,475,000  in United States Steel on October 26, 2024 and sell it today you would lose (15,000) from holding United States Steel or give up 1.02% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

United States Steel  vs.  Rio Tinto PLC

United States Steel

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days United States Steel has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, United States is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Rio Tinto PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Rio Tinto is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with United States and Rio Tinto

The main advantage of trading using opposite United States and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if United States 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 United States Steel and Rio Tinto PLC 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..