Correlation Between Rio Tinto and Wesfarmers

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

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

Diversification Opportunities for Rio Tinto and Wesfarmers

-0.24

Correlation Coefficient

Rio Tinto  Wesfarmers

Very good diversification

The 3 months correlation between Rio and Wesfarmers is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto and Wesfarmers in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers 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 Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers has no effect on the direction of Rio Tinto i.e., Rio Tinto and Wesfarmers go up and down completely randomly.

Pair Corralation between Rio Tinto and Wesfarmers

Assuming the 90 days trading horizon Rio Tinto is expected to under-perform the Wesfarmers. In addition to that, Rio Tinto is 1.16 times more volatile than Wesfarmers. It trades about -0.01 of its total potential returns per unit of risk. Wesfarmers is currently generating about 0.09 per unit of volatility. If you would invest  6,464  in Wesfarmers on September 3, 2024 and sell it today you would earn a total of  862.00  from holding Wesfarmers or generate 13.34% return on investment over 90 days.

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

Rio Tinto  vs.  Wesfarmers

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.

Wesfarmers

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Wesfarmers are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Wesfarmers is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Rio Tinto and Wesfarmers

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

The idea behind Rio Tinto and Wesfarmers 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.