Correlation Between Lithium Chile and Erdene Resource

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

By analyzing existing cross correlation between Lithium Chile and Erdene Resource Development, you can compare the effects of market volatilities on Lithium Chile and Erdene Resource 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 Lithium Chile with a short position of Erdene Resource. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lithium Chile and Erdene Resource.

Diversification Opportunities for Lithium Chile and Erdene Resource

0.77

Correlation Coefficient

Lithium Chile  Erdene Resource

Poor diversification

The 3 months correlation between Lithium and Erdene is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Lithium Chile and Erdene Resource Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Erdene Resource Deve and Lithium Chile 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 Lithium Chile are associated (or correlated) with Erdene Resource. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Erdene Resource Deve has no effect on the direction of Lithium Chile i.e., Lithium Chile and Erdene Resource go up and down completely randomly.

Pair Corralation between Lithium Chile and Erdene Resource

Assuming the 90 days trading horizon Lithium Chile is expected to generate 2.05 times more return on investment than Erdene Resource. However, Lithium Chile is 2.05 times more volatile than Erdene Resource Development. It trades about 0.07 of its potential returns per unit of risk. Erdene Resource Development is currently generating about 0.11 per unit of risk. If you would invest  70.00  in Lithium Chile on February 5, 2024 and sell it today you would earn a total of  6.00  from holding Lithium Chile or generate 8.57% return on investment over 90 days.

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

Lithium Chile  vs.  Erdene Resource Development

Lithium Chile

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lithium Chile are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Lithium Chile showed solid returns over the last few months and may actually be approaching a breakup point.

Erdene Resource Deve

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Erdene Resource Development are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, Erdene Resource displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lithium Chile and Erdene Resource

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

The idea behind Lithium Chile and Erdene Resource Development 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.