Correlation Between Vale SA and Telefonica

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

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

Diversification Opportunities for Vale SA and Telefonica

0.71

Correlation Coefficient

Vale SA  Telefonica

Poor diversification

The 3 months correlation between Vale and Telefonica is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Telefonica in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telefonica 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 Telefonica. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telefonica has no effect on the direction of Vale SA i.e., Vale SA and Telefonica go up and down completely randomly.

Pair Corralation between Vale SA and Telefonica

Assuming the 90 days trading horizon Vale SA is expected to under-perform the Telefonica. In addition to that, Vale SA is 1.75 times more volatile than Telefonica. It trades about -0.25 of its total potential returns per unit of risk. Telefonica is currently generating about -0.33 per unit of volatility. If you would invest  420.00  in Telefonica on October 8, 2024 and sell it today you would lose (23.00) from holding Telefonica or give up 5.48% of portfolio value over 90 days.

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

Vale SA  vs.  Telefonica

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. In spite of unsteady performance in the last few months, the Stock's primary indicators remain very healthy which may send shares a bit higher in February 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Telefonica

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Telefonica has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Vale SA and Telefonica

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

The idea behind Vale SA and Telefonica 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.