Correlation Between Lithium Australia and Leading Edge

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

By analyzing existing cross correlation between Lithium Australia NL and Leading Edge Materials, you can compare the effects of market volatilities on Lithium Australia and Leading Edge 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 Lithium Australia with a short position of Leading Edge. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lithium Australia and Leading Edge.

Diversification Opportunities for Lithium Australia and Leading Edge

-0.11

Correlation Coefficient

Lithium Australia  Leading Edge

Good diversification

The 3 months correlation between Lithium and Leading is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding Lithium Australia NL and Leading Edge Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Leading Edge Materials and Lithium Australia 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 Lithium Australia NL are associated (or correlated) with Leading Edge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Leading Edge Materials has no effect on the direction of Lithium Australia i.e., Lithium Australia and Leading Edge go up and down completely randomly.

Pair Corralation between Lithium Australia and Leading Edge

Assuming the 90 days horizon Lithium Australia NL is expected to generate 9.6 times more return on investment than Leading Edge. However, Lithium Australia is 9.6 times more volatile than Leading Edge Materials. It trades about 0.07 of its potential returns per unit of risk. Leading Edge Materials is currently generating about 0.01 per unit of risk. If you would invest  2.07  in Lithium Australia NL on September 13, 2024 and sell it today you would lose (1.08) from holding Lithium Australia NL or give up 52.17% of portfolio value over 90 days.

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

Lithium Australia NL  vs.  Leading Edge Materials

Lithium Australia

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lithium Australia NL are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Lithium Australia reported solid returns over the last few months and may actually be approaching a breakup point.

Leading Edge Materials

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Leading Edge Materials are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile forward indicators, Leading Edge may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Lithium Australia and Leading Edge

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

The idea behind Lithium Australia NL and Leading Edge Materials 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.

Check out your portfolio center.

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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.