Correlation Between BHP Group and Rio Tinto

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

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

Diversification Opportunities for BHP Group and Rio Tinto

0.93

Correlation Coefficient

BHP Group  Rio Tinto

Almost no diversification

The 3 months correlation between BHP and Rio is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding BHP Group Limited and Rio Tinto ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rio Tinto ADR and BHP Group 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 BHP Group Limited 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 ADR has no effect on the direction of BHP Group i.e., BHP Group and Rio Tinto go up and down completely randomly.

Pair Corralation between BHP Group and Rio Tinto

Considering the 90-day investment horizon BHP Group is expected to generate 1.63 times less return on investment than Rio Tinto. But when comparing it to its historical volatility, BHP Group Limited is 1.01 times less risky than Rio Tinto. It trades about 0.05 of its potential returns per unit of risk. Rio Tinto ADR is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  5,796  in Rio Tinto ADR on January 20, 2024 and sell it today you would earn a total of  872.00  from holding Rio Tinto ADR or generate 15.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	99.19%
Values	Daily Returns

BHP Group Limited  vs.  Rio Tinto ADR

BHP Group Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BHP Group Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical indicators, BHP Group is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

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.

Pair Trading with BHP Group and Rio Tinto

The main advantage of trading using opposite BHP Group and Rio Tinto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BHP Group 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 BHP Group Limited and Rio Tinto ADR 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 Global Correlations module to find global opportunities by holding instruments from different markets.