Correlation Between Indian Railway and REC

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

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

Diversification Opportunities for Indian Railway and REC

0.89

Correlation Coefficient

Indian Railway  REC

Very poor diversification

The 3 months correlation between Indian and REC is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Indian Railway Finance and REC Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on REC Limited and Indian Railway 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 Railway Finance are associated (or correlated) with REC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of REC Limited has no effect on the direction of Indian Railway i.e., Indian Railway and REC go up and down completely randomly.

Pair Corralation between Indian Railway and REC

Assuming the 90 days trading horizon Indian Railway Finance is expected to under-perform the REC. In addition to that, Indian Railway is 1.03 times more volatile than REC Limited. It trades about -0.1 of its total potential returns per unit of risk. REC Limited is currently generating about -0.09 per unit of volatility. If you would invest  61,248  in REC Limited on September 2, 2024 and sell it today you would lose (7,988) from holding REC Limited or give up 13.04% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

Indian Railway Finance  vs.  REC Limited

Indian Railway Finance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Indian Railway Finance has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

REC Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days REC Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest abnormal performance, the Stock's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Indian Railway and REC

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

The idea behind Indian Railway Finance and REC 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.