Correlation Between Anglo American and Vale SA

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

By analyzing existing cross correlation between Anglo American plc and Vale SA, you can compare the effects of market volatilities on Anglo American and Vale SA 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 Anglo American with a short position of Vale SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of Anglo American and Vale SA.

Diversification Opportunities for Anglo American and Vale SA

0.64

Correlation Coefficient

Anglo American  Vale SA

Poor diversification

The 3 months correlation between Anglo and Vale is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Anglo American plc and Vale SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vale SA and Anglo American 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 Anglo American plc are associated (or correlated) with Vale SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vale SA has no effect on the direction of Anglo American i.e., Anglo American and Vale SA go up and down completely randomly.

Pair Corralation between Anglo American and Vale SA

Assuming the 90 days trading horizon Anglo American plc is expected to generate 1.04 times more return on investment than Vale SA. However, Anglo American is 1.04 times more volatile than Vale SA. It trades about 0.13 of its potential returns per unit of risk. Vale SA is currently generating about 0.02 per unit of risk. If you would invest  2,500  in Anglo American plc on September 4, 2024 and sell it today you would earn a total of  485.00  from holding Anglo American plc or generate 19.4% return on investment over 90 days.

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

Anglo American plc  vs.  Vale SA

Anglo American plc

Risk-Adjusted Performance

10 of 100

OK

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

Vale SA

Risk-Adjusted Performance

1 of 100

Weak

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

Pair Trading with Anglo American and Vale SA

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

The idea behind Anglo American plc and Vale SA 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.