Correlation Between Arafura Resources and Lynas Rare

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

By analyzing existing cross correlation between Arafura Resources and Lynas Rare Earths, you can compare the effects of market volatilities on Arafura Resources and Lynas Rare 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 Arafura Resources with a short position of Lynas Rare. Check out your portfolio center. Please also check ongoing floating volatility patterns of Arafura Resources and Lynas Rare.

Diversification Opportunities for Arafura Resources and Lynas Rare

0.31

Correlation Coefficient

Arafura Resources  Lynas Rare

Weak diversification

The 3 months correlation between Arafura and Lynas is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding Arafura Resources and Lynas Rare Earths in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lynas Rare Earths and Arafura Resources 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 Arafura Resources are associated (or correlated) with Lynas Rare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lynas Rare Earths has no effect on the direction of Arafura Resources i.e., Arafura Resources and Lynas Rare go up and down completely randomly.

Pair Corralation between Arafura Resources and Lynas Rare

Assuming the 90 days horizon Arafura Resources is expected to under-perform the Lynas Rare. In addition to that, Arafura Resources is 3.54 times more volatile than Lynas Rare Earths. It trades about -0.09 of its total potential returns per unit of risk. Lynas Rare Earths is currently generating about -0.16 per unit of volatility. If you would invest  521.00  in Lynas Rare Earths on September 4, 2024 and sell it today you would lose (69.00) from holding Lynas Rare Earths or give up 13.24% of portfolio value over 90 days.

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

Arafura Resources  vs.  Lynas Rare Earths

Arafura Resources

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Arafura Resources 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 technical and fundamental indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Lynas Rare Earths

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Lynas Rare Earths are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong fundamental indicators, Lynas Rare is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Arafura Resources and Lynas Rare

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

The idea behind Arafura Resources and Lynas Rare Earths 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.

Check out your portfolio center.

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 Commodity Directory module to find actively traded commodities issued by global exchanges.