Correlation Between Indian Railway and Tata Consultancy

Can any of the company-specific risk be diversified away by investing in both Indian Railway and Tata Consultancy 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 Tata Consultancy 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 Tata Consultancy Services, you can compare the effects of market volatilities on Indian Railway and Tata Consultancy 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 Tata Consultancy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Indian Railway and Tata Consultancy.

Diversification Opportunities for Indian Railway and Tata Consultancy

0.8

Correlation Coefficient

Indian Railway  Tata Consultancy

Very poor diversification

The 3 months correlation between Indian and Tata is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Indian Railway Finance and Tata Consultancy Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tata Consultancy Services 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 Tata Consultancy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tata Consultancy Services has no effect on the direction of Indian Railway i.e., Indian Railway and Tata Consultancy go up and down completely randomly.

Pair Corralation between Indian Railway and Tata Consultancy

Assuming the 90 days trading horizon Indian Railway Finance is expected to under-perform the Tata Consultancy. In addition to that, Indian Railway is 1.88 times more volatile than Tata Consultancy Services. It trades about -0.1 of its total potential returns per unit of risk. Tata Consultancy Services is currently generating about -0.06 per unit of volatility. If you would invest  450,137  in Tata Consultancy Services on September 3, 2024 and sell it today you would lose (22,472) from holding Tata Consultancy Services or give up 4.99% of portfolio value over 90 days.

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

Indian Railway Finance  vs.  Tata Consultancy Services

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 unsteady 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.

Tata Consultancy Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tata Consultancy Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Tata Consultancy is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Indian Railway and Tata Consultancy

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

The idea behind Indian Railway Finance and Tata Consultancy Services 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.