Correlation Between Vale Indonesia and United Tractors

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

By analyzing existing cross correlation between Vale Indonesia Tbk and United Tractors Tbk, you can compare the effects of market volatilities on Vale Indonesia and United Tractors 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 Indonesia with a short position of United Tractors. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vale Indonesia and United Tractors.

Diversification Opportunities for Vale Indonesia and United Tractors

0.78

Correlation Coefficient

Vale Indonesia  United Tractors

Poor diversification

The 3 months correlation between Vale and United is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Vale Indonesia Tbk and United Tractors Tbk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Tractors Tbk and Vale Indonesia 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 Indonesia Tbk are associated (or correlated) with United Tractors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Tractors Tbk has no effect on the direction of Vale Indonesia i.e., Vale Indonesia and United Tractors go up and down completely randomly.

Pair Corralation between Vale Indonesia and United Tractors

Assuming the 90 days trading horizon Vale Indonesia Tbk is expected to generate 1.51 times more return on investment than United Tractors. However, Vale Indonesia is 1.51 times more volatile than United Tractors Tbk. It trades about -0.01 of its potential returns per unit of risk. United Tractors Tbk is currently generating about -0.15 per unit of risk. If you would invest  411,000  in Vale Indonesia Tbk on February 4, 2024 and sell it today you would lose (4,000) from holding Vale Indonesia Tbk or give up 0.97% of portfolio value over 90 days.

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

Vale Indonesia Tbk  vs.  United Tractors Tbk

Vale Indonesia Tbk

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vale Indonesia Tbk are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, Vale Indonesia may actually be approaching a critical reversion point that can send shares even higher in June 2024.

United Tractors Tbk

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in United Tractors Tbk are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, United Tractors may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Vale Indonesia and United Tractors

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

The idea behind Vale Indonesia Tbk and United Tractors Tbk 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.