Correlation Between Indian Oil and Axita Cotton

Can any of the company-specific risk be diversified away by investing in both Indian Oil and Axita Cotton 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 Indian Oil and Axita Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Indian Oil and Axita Cotton Limited, you can compare the effects of market volatilities on Indian Oil and Axita Cotton 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 Indian Oil with a short position of Axita Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of Indian Oil and Axita Cotton.

Diversification Opportunities for Indian Oil and Axita Cotton

0.87

Correlation Coefficient

Indian Oil  Axita Cotton

Very poor diversification

The 3 months correlation between Indian and Axita is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Indian Oil and Axita Cotton Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Axita Cotton Limited and Indian Oil 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 Indian Oil are associated (or correlated) with Axita Cotton. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Axita Cotton Limited has no effect on the direction of Indian Oil i.e., Indian Oil and Axita Cotton go up and down completely randomly.

Pair Corralation between Indian Oil and Axita Cotton

Assuming the 90 days trading horizon Indian Oil is expected to generate 1.34 times more return on investment than Axita Cotton. However, Indian Oil is 1.34 times more volatile than Axita Cotton Limited. It trades about -0.18 of its potential returns per unit of risk. Axita Cotton Limited is currently generating about -0.46 per unit of risk. If you would invest  16,970  in Indian Oil on September 21, 2024 and sell it today you would lose (3,262) from holding Indian Oil or give up 19.22% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Indian Oil  vs.  Axita Cotton Limited

Indian Oil

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Indian Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Axita Cotton Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Axita Cotton Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's forward indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Indian Oil and Axita Cotton

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

The idea behind Indian Oil and Axita Cotton 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.