Correlation Between MRF and RITES

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

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

Diversification Opportunities for MRF and RITES

0.84

Correlation Coefficient

MRF  RITES

Very poor diversification

The 3 months correlation between MRF and RITES is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding MRF Limited and RITES Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RITES Limited 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 RITES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RITES Limited has no effect on the direction of MRF i.e., MRF and RITES go up and down completely randomly.

Pair Corralation between MRF and RITES

Assuming the 90 days trading horizon MRF is expected to generate 2.3 times less return on investment than RITES. But when comparing it to its historical volatility, MRF Limited is 2.45 times less risky than RITES. It trades about 0.05 of its potential returns per unit of risk. RITES Limited is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  22,314  in RITES Limited on September 23, 2024 and sell it today you would earn a total of  5,786  from holding RITES Limited or generate 25.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.25%
Values	Daily Returns

MRF Limited  vs.  RITES Limited

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 weak 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.

RITES Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days RITES Limited 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 very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with MRF and RITES

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

The idea behind MRF Limited and RITES 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.