Correlation Between Fortescue Metals and Kumba Iron

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

By analyzing existing cross correlation between Fortescue Metals Group and Kumba Iron Ore, you can compare the effects of market volatilities on Fortescue Metals and Kumba Iron 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 Fortescue Metals with a short position of Kumba Iron. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fortescue Metals and Kumba Iron.

Diversification Opportunities for Fortescue Metals and Kumba Iron

0.8

Correlation Coefficient

Fortescue Metals  Kumba Iron

Very poor diversification

The 3 months correlation between Fortescue and Kumba is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and Kumba Iron Ore in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kumba Iron Ore and Fortescue Metals 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 Fortescue Metals Group are associated (or correlated) with Kumba Iron. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kumba Iron Ore has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and Kumba Iron go up and down completely randomly.

Pair Corralation between Fortescue Metals and Kumba Iron

Assuming the 90 days horizon Fortescue Metals Group is expected to generate 0.95 times more return on investment than Kumba Iron. However, Fortescue Metals Group is 1.05 times less risky than Kumba Iron. It trades about 0.05 of its potential returns per unit of risk. Kumba Iron Ore is currently generating about 0.01 per unit of risk. If you would invest  2,328  in Fortescue Metals Group on September 16, 2024 and sell it today you would earn a total of  126.00  from holding Fortescue Metals Group or generate 5.41% return on investment over 90 days.

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

Fortescue Metals Group  vs.  Kumba Iron Ore

Fortescue Metals

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Fortescue Metals Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile technical and fundamental indicators, Fortescue Metals may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Kumba Iron Ore

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Kumba Iron Ore has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Kumba Iron is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Fortescue Metals and Kumba Iron

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

The idea behind Fortescue Metals Group and Kumba Iron Ore 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..