Correlation Between Rio Tinto and Frontier Lithium

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

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

Diversification Opportunities for Rio Tinto and Frontier Lithium

0.62

Correlation Coefficient

Rio Tinto  Frontier Lithium

Poor diversification

The 3 months correlation between Rio and Frontier is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto Group and Frontier Lithium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Frontier 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 Group are associated (or correlated) with Frontier Lithium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Frontier Lithium has no effect on the direction of Rio Tinto i.e., Rio Tinto and Frontier Lithium go up and down completely randomly.

Pair Corralation between Rio Tinto and Frontier Lithium

Assuming the 90 days horizon Rio Tinto Group is expected to generate 0.71 times more return on investment than Frontier Lithium. However, Rio Tinto Group is 1.4 times less risky than Frontier Lithium. It trades about -0.03 of its potential returns per unit of risk. Frontier Lithium is currently generating about -0.16 per unit of risk. If you would invest  7,929  in Rio Tinto Group on September 23, 2024 and sell it today you would lose (534.00) from holding Rio Tinto Group or give up 6.73% of portfolio value over 90 days.

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

Rio Tinto Group  vs.  Frontier Lithium

Rio Tinto Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Rio Tinto is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Frontier Lithium

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Frontier Lithium has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unfluctuating performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Rio Tinto and Frontier Lithium

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

The idea behind Rio Tinto Group and Frontier Lithium 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..