Correlation Between Larsen Toubro and China Communications

Can any of the company-specific risk be diversified away by investing in both Larsen Toubro and China Communications 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 China Communications 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 China Communications Construction, you can compare the effects of market volatilities on Larsen Toubro and China Communications 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 China Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Larsen Toubro and China Communications.

Diversification Opportunities for Larsen Toubro and China Communications

0.04

Correlation Coefficient

Larsen Toubro  China Communications

Significant diversification

The 3 months correlation between Larsen and China is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and China Communications Construct in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Communications 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 China Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Communications has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and China Communications go up and down completely randomly.

Pair Corralation between Larsen Toubro and China Communications

Assuming the 90 days horizon Larsen Toubro is expected to generate 7.37 times less return on investment than China Communications. But when comparing it to its historical volatility, Larsen Toubro Limited is 2.96 times less risky than China Communications. It trades about 0.03 of its potential returns per unit of risk. China Communications Construction is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  18.00  in China Communications Construction on September 4, 2024 and sell it today you would earn a total of  44.00  from holding China Communications Construction or generate 244.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.6%
Values	Daily Returns

Larsen Toubro Limited  vs.  China Communications Construct

Larsen Toubro Limited

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Larsen Toubro Limited are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Larsen Toubro may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Communications

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Communications Construction are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Communications reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Larsen Toubro and China Communications

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

The idea behind Larsen Toubro Limited and China Communications Construction 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.

Check out your portfolio center.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.