Correlation Between Rio Tinto and Australian Dairy

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

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

Diversification Opportunities for Rio Tinto and Australian Dairy

0.09

Correlation Coefficient

Rio Tinto  Australian Dairy

Significant diversification

The 3 months correlation between Rio and Australian is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto and Australian Dairy Farms in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Australian Dairy Farms and Rio Tinto 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 Rio Tinto are associated (or correlated) with Australian Dairy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Australian Dairy Farms has no effect on the direction of Rio Tinto i.e., Rio Tinto and Australian Dairy go up and down completely randomly.

Pair Corralation between Rio Tinto and Australian Dairy

Assuming the 90 days trading horizon Rio Tinto is expected to generate 8.78 times less return on investment than Australian Dairy. But when comparing it to its historical volatility, Rio Tinto is 3.74 times less risky than Australian Dairy. It trades about 0.1 of its potential returns per unit of risk. Australian Dairy Farms is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  1.80  in Australian Dairy Farms on September 3, 2024 and sell it today you would earn a total of  2.00  from holding Australian Dairy Farms or generate 111.11% return on investment over 90 days.

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

Rio Tinto  vs.  Australian Dairy Farms

Rio Tinto

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Australian Dairy Farms

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Australian Dairy Farms are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain technical and fundamental indicators, Australian Dairy unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio Tinto and Australian Dairy

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

The idea behind Rio Tinto and Australian Dairy Farms 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.