Correlation Between Carsales and Rio Tinto

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

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

Diversification Opportunities for Carsales and Rio Tinto

0.28

Correlation Coefficient

Carsales  Rio Tinto

Modest diversification

The 3 months correlation between Carsales and Rio is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding CarsalesCom 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 Carsales 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 CarsalesCom 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 Carsales i.e., Carsales and Rio Tinto go up and down completely randomly.

Pair Corralation between Carsales and Rio Tinto

Assuming the 90 days horizon CarsalesCom is expected to generate 0.87 times more return on investment than Rio Tinto. However, CarsalesCom is 1.15 times less risky than Rio Tinto. It trades about 0.16 of its potential returns per unit of risk. Rio Tinto Group is currently generating about 0.09 per unit of risk. If you would invest  2,201  in CarsalesCom on September 3, 2024 and sell it today you would earn a total of  339.00  from holding CarsalesCom or generate 15.4% return on investment over 90 days.

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

CarsalesCom  vs.  Rio Tinto Group

CarsalesCom

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CarsalesCom are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Carsales reported solid returns over the last few months and may actually be approaching a breakup point.

Rio Tinto Group

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Rio Tinto Group are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Rio Tinto may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Carsales and Rio Tinto

The main advantage of trading using opposite Carsales and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Carsales 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 CarsalesCom 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.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.