Correlation Between Vale SA and Financial Industries

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

Diversification Opportunities for Vale SA and Financial Industries

0.65

Correlation Coefficient

Vale SA  Financial Industries

Poor diversification

The 3 months correlation between Vale and Financial is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR and Financial Industries Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Industries 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 Financial Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Industries has no effect on the direction of Vale SA i.e., Vale SA and Financial Industries go up and down completely randomly.

Pair Corralation between Vale SA and Financial Industries

Given the investment horizon of 90 days Vale SA is expected to generate 1.02 times less return on investment than Financial Industries. In addition to that, Vale SA is 2.26 times more volatile than Financial Industries Fund. It trades about 0.05 of its total potential returns per unit of risk. Financial Industries Fund is currently generating about 0.11 per unit of volatility. If you would invest  1,798  in Financial Industries Fund on May 4, 2025 and sell it today you would earn a total of  95.00  from holding Financial Industries Fund or generate 5.28% return on investment over 90 days.

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

Vale SA ADR  vs.  Financial Industries Fund

Vale SA ADR

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vale SA ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. 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.

Financial Industries

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Industries Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Financial Industries is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vale SA and Financial Industries

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

The idea behind Vale SA ADR and Financial Industries Fund 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.