Correlation Between Rio2 and Cerrado Gold

Can any of the company-specific risk be diversified away by investing in both Rio2 and Cerrado Gold 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 Rio2 and Cerrado Gold into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Rio2 Limited and Cerrado Gold, you can compare the effects of market volatilities on Rio2 and Cerrado Gold 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 Rio2 with a short position of Cerrado Gold. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio2 and Cerrado Gold.

Diversification Opportunities for Rio2 and Cerrado Gold

0.67

Correlation Coefficient

Rio2  Cerrado Gold

Poor diversification

The 3 months correlation between Rio2 and Cerrado is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Rio2 Limited and Cerrado Gold in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cerrado Gold and Rio2 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 Rio2 Limited are associated (or correlated) with Cerrado Gold. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cerrado Gold has no effect on the direction of Rio2 i.e., Rio2 and Cerrado Gold go up and down completely randomly.

Pair Corralation between Rio2 and Cerrado Gold

Assuming the 90 days horizon Rio2 is expected to generate 3.21 times less return on investment than Cerrado Gold. But when comparing it to its historical volatility, Rio2 Limited is 2.17 times less risky than Cerrado Gold. It trades about 0.07 of its potential returns per unit of risk. Cerrado Gold is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  17.00  in Cerrado Gold on September 4, 2024 and sell it today you would earn a total of  7.00  from holding Cerrado Gold or generate 41.18% return on investment over 90 days.

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

Rio2 Limited  vs.  Cerrado Gold

Rio2 Limited

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio2 Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, Rio2 reported solid returns over the last few months and may actually be approaching a breakup point.

Cerrado Gold

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cerrado Gold are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Cerrado Gold reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rio2 and Cerrado Gold

The main advantage of trading using opposite Rio2 and Cerrado Gold positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rio2 position performs unexpectedly, Cerrado Gold 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 Cerrado Gold will offset losses from the drop in Cerrado Gold's long position.

The idea behind Rio2 Limited and Cerrado Gold 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.