Correlation Between Vale SA and Electra Battery

Can any of the company-specific risk be diversified away by investing in both Vale SA and Electra Battery 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 Electra Battery 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 Electra Battery Materials, you can compare the effects of market volatilities on Vale SA and Electra Battery 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 Electra Battery. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vale SA and Electra Battery.

Diversification Opportunities for Vale SA and Electra Battery

0.64

Correlation Coefficient

Vale SA  Electra Battery

Poor diversification

The 3 months correlation between Vale and Electra is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR and Electra Battery Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Electra Battery Materials 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 Electra Battery. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Electra Battery Materials has no effect on the direction of Vale SA i.e., Vale SA and Electra Battery go up and down completely randomly.

Pair Corralation between Vale SA and Electra Battery

Given the investment horizon of 90 days Vale SA ADR is expected to under-perform the Electra Battery. But the stock apears to be less risky and, when comparing its historical volatility, Vale SA ADR is 3.3 times less risky than Electra Battery. The stock trades about -0.05 of its potential returns per unit of risk. The Electra Battery Materials is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  52.00  in Electra Battery Materials on February 12, 2024 and sell it today you would lose (6.00) from holding Electra Battery Materials or give up 11.54% of portfolio value over 90 days.

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

Vale SA ADR  vs.  Electra Battery Materials

Vale SA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

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 rather sound essential indicators, Vale SA is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Electra Battery Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Electra Battery Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's fundamental drivers remain very healthy which may send shares a bit higher in June 2024. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Vale SA and Electra Battery

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

The idea behind Vale SA ADR and Electra Battery Materials 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.