Correlation Between GM and Rio Tinto

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

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

Diversification Opportunities for GM and Rio Tinto

-0.6

Correlation Coefficient

GM  Rio Tinto

Excellent diversification

The 3 months correlation between GM and Rio is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Rio Tinto PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto PLC and GM 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 General Motors are associated (or correlated) with Rio Tinto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rio Tinto PLC has no effect on the direction of GM i.e., GM and Rio Tinto go up and down completely randomly.

Pair Corralation between GM and Rio Tinto

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the Rio Tinto. In addition to that, GM is 2.07 times more volatile than Rio Tinto PLC. It trades about -0.12 of its total potential returns per unit of risk. Rio Tinto PLC is currently generating about -0.09 per unit of volatility. If you would invest  489,350  in Rio Tinto PLC on September 20, 2024 and sell it today you would lose (13,650) from holding Rio Tinto PLC or give up 2.79% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	91.3%
Values	Daily Returns

General Motors  vs.  Rio Tinto PLC

General Motors

Risk-Adjusted Performance

3 of 100

Weak

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

Rio Tinto PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Rio Tinto is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with GM and Rio Tinto

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

The idea behind General Motors and Rio Tinto PLC 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.