Correlation Between Interarch Building and Larsen Toubro

Can any of the company-specific risk be diversified away by investing in both Interarch Building and Larsen Toubro 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 Interarch Building and Larsen Toubro into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Interarch Building Products and Larsen Toubro Limited, you can compare the effects of market volatilities on Interarch Building and Larsen Toubro 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 Interarch Building with a short position of Larsen Toubro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Interarch Building and Larsen Toubro.

Diversification Opportunities for Interarch Building and Larsen Toubro

0.07

Correlation Coefficient

Interarch Building  Larsen Toubro

Significant diversification

The 3 months correlation between Interarch and Larsen is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Interarch Building Products and Larsen Toubro Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Larsen Toubro Limited and Interarch Building 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 Interarch Building Products are associated (or correlated) with Larsen Toubro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Larsen Toubro Limited has no effect on the direction of Interarch Building i.e., Interarch Building and Larsen Toubro go up and down completely randomly.

Pair Corralation between Interarch Building and Larsen Toubro

Assuming the 90 days trading horizon Interarch Building Products is expected to generate 1.6 times more return on investment than Larsen Toubro. However, Interarch Building is 1.6 times more volatile than Larsen Toubro Limited. It trades about 0.26 of its potential returns per unit of risk. Larsen Toubro Limited is currently generating about 0.03 per unit of risk. If you would invest  143,400  in Interarch Building Products on September 23, 2024 and sell it today you would earn a total of  20,775  from holding Interarch Building Products or generate 14.49% return on investment over 90 days.

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

Interarch Building Products  vs.  Larsen Toubro Limited

Interarch Building

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Interarch Building Products are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Interarch Building reported solid returns over the last few months and may actually be approaching a breakup point.

Larsen Toubro Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Larsen Toubro Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Larsen Toubro is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Interarch Building and Larsen Toubro

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

The idea behind Interarch Building Products and Larsen Toubro Limited 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.