Correlation Between Rio Tinto and Piedmont Lithium

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

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

Diversification Opportunities for Rio Tinto and Piedmont Lithium

0.17

Correlation Coefficient

Rio Tinto  Piedmont Lithium

Average diversification

The 3 months correlation between Rio and Piedmont is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto ADR and Piedmont Lithium Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Piedmont Lithium 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 ADR are associated (or correlated) with Piedmont Lithium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Piedmont Lithium has no effect on the direction of Rio Tinto i.e., Rio Tinto and Piedmont Lithium go up and down completely randomly.

Pair Corralation between Rio Tinto and Piedmont Lithium

Considering the 90-day investment horizon Rio Tinto is expected to generate 14.7 times less return on investment than Piedmont Lithium. But when comparing it to its historical volatility, Rio Tinto ADR is 4.81 times less risky than Piedmont Lithium. It trades about 0.05 of its potential returns per unit of risk. Piedmont Lithium Ltd is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  748.00  in Piedmont Lithium Ltd on September 3, 2024 and sell it today you would earn a total of  514.00  from holding Piedmont Lithium Ltd or generate 68.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Rio Tinto ADR  vs.  Piedmont Lithium Ltd

Rio Tinto ADR

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy forward indicators, Rio Tinto is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Piedmont Lithium

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Piedmont Lithium Ltd are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite fragile essential indicators, Piedmont Lithium disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio Tinto and Piedmont Lithium

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

The idea behind Rio Tinto ADR and Piedmont Lithium Ltd 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.