Correlation Between Larsen Toubro and Gujarat Raffia

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

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

Diversification Opportunities for Larsen Toubro and Gujarat Raffia

0.68

Correlation Coefficient

Larsen Toubro  Gujarat Raffia

Poor diversification

The 3 months correlation between Larsen and Gujarat is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and Gujarat Raffia Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gujarat Raffia Industries and Larsen Toubro 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 Larsen Toubro Limited are associated (or correlated) with Gujarat Raffia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gujarat Raffia Industries has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and Gujarat Raffia go up and down completely randomly.

Pair Corralation between Larsen Toubro and Gujarat Raffia

Assuming the 90 days trading horizon Larsen Toubro is expected to generate 16.64 times less return on investment than Gujarat Raffia. But when comparing it to its historical volatility, Larsen Toubro Limited is 1.98 times less risky than Gujarat Raffia. It trades about 0.03 of its potential returns per unit of risk. Gujarat Raffia Industries is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  4,660  in Gujarat Raffia Industries on September 19, 2024 and sell it today you would earn a total of  2,509  from holding Gujarat Raffia Industries or generate 53.84% return on investment over 90 days.

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

Larsen Toubro Limited  vs.  Gujarat Raffia Industries

Larsen Toubro Limited

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Larsen Toubro Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

Gujarat Raffia Industries

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Gujarat Raffia Industries are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady technical and fundamental indicators, Gujarat Raffia reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Larsen Toubro and Gujarat Raffia

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

The idea behind Larsen Toubro Limited and Gujarat Raffia Industries 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.