Correlation Between MRF and Hindustan Construction

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

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

Diversification Opportunities for MRF and Hindustan Construction

0.63

Correlation Coefficient

MRF  Hindustan Construction

Poor diversification

The 3 months correlation between MRF and Hindustan is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding MRF Limited and Hindustan Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hindustan Construction and MRF 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 MRF Limited are associated (or correlated) with Hindustan Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hindustan Construction has no effect on the direction of MRF i.e., MRF and Hindustan Construction go up and down completely randomly.

Pair Corralation between MRF and Hindustan Construction

Assuming the 90 days trading horizon MRF Limited is expected to under-perform the Hindustan Construction. But the stock apears to be less risky and, when comparing its historical volatility, MRF Limited is 3.03 times less risky than Hindustan Construction. The stock trades about -0.11 of its potential returns per unit of risk. The Hindustan Construction is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  4,263  in Hindustan Construction on September 27, 2024 and sell it today you would lose (348.00) from holding Hindustan Construction or give up 8.16% of portfolio value over 90 days.

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

MRF Limited  vs.  Hindustan Construction

MRF Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MRF Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Hindustan Construction

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with MRF and Hindustan Construction

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

The idea behind MRF Limited and Hindustan 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.