Correlation Between Rio Tinto and American Lithium

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

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

Diversification Opportunities for Rio Tinto and American Lithium

0.13

Correlation Coefficient

Rio Tinto  American Lithium

Average diversification

The 3 months correlation between Rio and American is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto Group and American Lithium Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Lithium Corp and Rio Tinto 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 Rio Tinto Group are associated (or correlated) with American Lithium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Lithium Corp has no effect on the direction of Rio Tinto i.e., Rio Tinto and American Lithium go up and down completely randomly.

Pair Corralation between Rio Tinto and American Lithium

Assuming the 90 days trading horizon Rio Tinto Group is expected to under-perform the American Lithium. But the stock apears to be less risky and, when comparing its historical volatility, Rio Tinto Group is 6.23 times less risky than American Lithium. The stock trades about -0.02 of its potential returns per unit of risk. The American Lithium Corp is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  36.00  in American Lithium Corp on September 24, 2024 and sell it today you would lose (2.00) from holding American Lithium Corp or give up 5.56% of portfolio value over 90 days.

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

Rio Tinto Group  vs.  American Lithium Corp

Rio Tinto Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Rio Tinto is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

American Lithium Corp

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Lithium Corp are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, American Lithium reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio Tinto and American Lithium

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

The idea behind Rio Tinto Group and American Lithium 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.