Correlation Between Anglo American and Liontown Resources

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

Diversification Opportunities for Anglo American and Liontown Resources

-0.13

Correlation Coefficient

Anglo American  Liontown Resources

Good diversification

The 3 months correlation between Anglo and Liontown is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Anglo American plc and Liontown Resources Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Liontown Resources 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 Liontown Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Liontown Resources has no effect on the direction of Anglo American i.e., Anglo American and Liontown Resources go up and down completely randomly.

Pair Corralation between Anglo American and Liontown Resources

Assuming the 90 days trading horizon Anglo American is expected to generate 1.0 times less return on investment than Liontown Resources. But when comparing it to its historical volatility, Anglo American plc is 4.82 times less risky than Liontown Resources. It trades about 0.07 of its potential returns per unit of risk. Liontown Resources Limited is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  39.00  in Liontown Resources Limited on September 23, 2024 and sell it today you would lose (9.00) from holding Liontown Resources Limited or give up 23.08% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.48%
Values	Daily Returns

Anglo American plc  vs.  Liontown Resources Limited

Anglo American plc

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Anglo American plc are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental drivers, Anglo American may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Liontown Resources

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Liontown Resources Limited are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Liontown Resources may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Anglo American and Liontown Resources

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

The idea behind Anglo American plc and Liontown Resources 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..