Correlation Between Vale SA and Rio Tinto

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

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

Diversification Opportunities for Vale SA and Rio Tinto

0.48

Correlation Coefficient

Vale SA  Rio Tinto

Very weak diversification

The 3 months correlation between Vale and Rio is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA and Rio Tinto Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto Group and Vale SA 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 Vale SA are associated (or correlated) with Rio Tinto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rio Tinto Group has no effect on the direction of Vale SA i.e., Vale SA and Rio Tinto go up and down completely randomly.

Pair Corralation between Vale SA and Rio Tinto

Assuming the 90 days trading horizon Vale SA is expected to under-perform the Rio Tinto. In addition to that, Vale SA is 1.0 times more volatile than Rio Tinto Group. It trades about -0.19 of its total potential returns per unit of risk. Rio Tinto Group is currently generating about -0.12 per unit of volatility. If you would invest  139,500  in Rio Tinto Group on September 26, 2024 and sell it today you would lose (20,500) from holding Rio Tinto Group or give up 14.7% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.08%
Values	Daily Returns

Vale SA  vs.  Rio Tinto Group

Vale SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's primary indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

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. In spite of weak performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Vale SA and Rio Tinto

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

The idea behind Vale SA and Rio Tinto Group 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.