Can any of the company-specific risk be diversified away by investing in both Vale SA and Core 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 Vale SA and Core Lithium into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vale SA ADR and Core Lithium, you can compare the effects of market volatilities on Vale SA and Core 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 Vale SA with a short position of Core Lithium. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vale SA and Core Lithium.
Diversification Opportunities for Vale SA and Core Lithium
The 3 months correlation between Vale and Core is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR and Core Lithium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Core Lithium 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 ADR are associated (or correlated) with Core Lithium. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Core Lithium has no effect on the direction of Vale SA i.e., Vale SA and Core Lithium go up and down completely randomly.
Given the investment horizon of 90 days Vale SA ADR is expected to generate 0.19 times more return on investment than Core Lithium. However, Vale SA ADR is 5.25 times less risky than Core Lithium. It trades about -0.26 of its potential returns per unit of risk. Core Lithium is currently generating about -0.07 per unit of risk. If you would invest 1,259 in Vale SA ADR on March 6, 2024 and sell it today you would lose (77.00) from holding Vale SA ADR or give up 6.12% of portfolio value over 90 days.
Over the last 90 days Vale SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's essential indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.
Over the last 90 days Core Lithium has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in July 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.