Correlation Between Fortescue Metals and South32

Can any of the company-specific risk be diversified away by investing in both Fortescue Metals and South32 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 South32 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 South32 Limited, you can compare the effects of market volatilities on Fortescue Metals and South32 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 South32. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fortescue Metals and South32.

Diversification Opportunities for Fortescue Metals and South32

0.33

Correlation Coefficient

Fortescue Metals  South32

Weak diversification

The 3 months correlation between Fortescue and South32 is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and South32 Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on South32 Limited 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 South32. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of South32 Limited has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and South32 go up and down completely randomly.

Pair Corralation between Fortescue Metals and South32

Assuming the 90 days horizon Fortescue Metals Group is expected to under-perform the South32. But the otc stock apears to be less risky and, when comparing its historical volatility, Fortescue Metals Group is 1.6 times less risky than South32. The otc stock trades about -0.03 of its potential returns per unit of risk. The South32 Limited is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  190.00  in South32 Limited on September 23, 2024 and sell it today you would earn a total of  24.00  from holding South32 Limited or generate 12.63% return on investment over 90 days.

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

Fortescue Metals Group  vs.  South32 Limited

Fortescue Metals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Fortescue Metals Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Fortescue Metals is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

South32 Limited

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in South32 Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating essential indicators, South32 reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fortescue Metals and South32

The main advantage of trading using opposite Fortescue Metals and South32 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fortescue Metals position performs unexpectedly, South32 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 South32 will offset losses from the drop in South32's long position.

The idea behind Fortescue Metals Group and South32 Limited 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.