Correlation Between Sims Metal and Rio Tinto

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

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

Diversification Opportunities for Sims Metal and Rio Tinto

0.7

Correlation Coefficient

Sims Metal  Rio Tinto

Poor diversification

The 3 months correlation between Sims and Rio is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Sims Metal Management and Rio Tinto Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto Group and Sims Metal 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 Sims Metal Management 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 Group has no effect on the direction of Sims Metal i.e., Sims Metal and Rio Tinto go up and down completely randomly.

Pair Corralation between Sims Metal and Rio Tinto

Assuming the 90 days horizon Sims Metal Management is expected to generate 1.15 times more return on investment than Rio Tinto. However, Sims Metal is 1.15 times more volatile than Rio Tinto Group. It trades about 0.15 of its potential returns per unit of risk. Rio Tinto Group is currently generating about 0.02 per unit of risk. If you would invest  661.00  in Sims Metal Management on August 31, 2024 and sell it today you would earn a total of  149.00  from holding Sims Metal Management or generate 22.54% return on investment over 90 days.

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

Sims Metal Management  vs.  Rio Tinto Group

Sims Metal Management

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sims Metal Management are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Sims Metal reported solid returns over the last few months and may actually be approaching a breakup point.

Rio Tinto Group

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto Group are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Rio Tinto is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Sims Metal and Rio Tinto

The main advantage of trading using opposite Sims Metal and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sims Metal 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 Sims Metal Management and Rio Tinto Group 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.