Correlation Between Compass Minerals and Lithium Americas

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

By analyzing existing cross correlation between Compass Minerals International and Lithium Americas Corp, you can compare the effects of market volatilities on Compass Minerals and Lithium Americas 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 Compass Minerals with a short position of Lithium Americas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Compass Minerals and Lithium Americas.

Diversification Opportunities for Compass Minerals and Lithium Americas

0.72

Correlation Coefficient

Compass Minerals  Lithium Americas

Poor diversification

The 3 months correlation between Compass and Lithium is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Compass Minerals International and Lithium Americas Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithium Americas Corp and Compass Minerals 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 Compass Minerals International are associated (or correlated) with Lithium Americas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lithium Americas Corp has no effect on the direction of Compass Minerals i.e., Compass Minerals and Lithium Americas go up and down completely randomly.

Pair Corralation between Compass Minerals and Lithium Americas

Considering the 90-day investment horizon Compass Minerals International is expected to generate 0.66 times more return on investment than Lithium Americas. However, Compass Minerals International is 1.51 times less risky than Lithium Americas. It trades about -0.04 of its potential returns per unit of risk. Lithium Americas Corp is currently generating about -0.05 per unit of risk. If you would invest  4,278  in Compass Minerals International on August 31, 2024 and sell it today you would lose (2,708) from holding Compass Minerals International or give up 63.3% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	90.3%
Values	Daily Returns

Compass Minerals International  vs.  Lithium Americas Corp

Compass Minerals Int

Risk-Adjusted Performance

17 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Compass Minerals International are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady primary indicators, Compass Minerals reported solid returns over the last few months and may actually be approaching a breakup point.

Lithium Americas Corp

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lithium Americas Corp are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting basic indicators, Lithium Americas exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Compass Minerals and Lithium Americas

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

The idea behind Compass Minerals International and Lithium Americas 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.