Correlation Between NMDC Steel and Indian Railway

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

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

Diversification Opportunities for NMDC Steel and Indian Railway

0.51

Correlation Coefficient

NMDC Steel  Indian Railway

Very weak diversification

The 3 months correlation between NMDC and Indian is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding NMDC Steel Limited and Indian Railway Finance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Indian Railway Finance and NMDC Steel 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 NMDC Steel Limited are associated (or correlated) with Indian Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Indian Railway Finance has no effect on the direction of NMDC Steel i.e., NMDC Steel and Indian Railway go up and down completely randomly.

Pair Corralation between NMDC Steel and Indian Railway

Assuming the 90 days trading horizon NMDC Steel Limited is expected to under-perform the Indian Railway. But the stock apears to be less risky and, when comparing its historical volatility, NMDC Steel Limited is 1.29 times less risky than Indian Railway. The stock trades about -0.07 of its potential returns per unit of risk. The Indian Railway Finance is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  14,631  in Indian Railway Finance on September 24, 2024 and sell it today you would earn a total of  148.00  from holding Indian Railway Finance or generate 1.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

NMDC Steel Limited  vs.  Indian Railway Finance

NMDC Steel Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NMDC Steel Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Even with unsteady performance in the last few months, the Stock's forward indicators remain relatively invariable which may send shares a bit higher in January 2025. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

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 comparatively stable basic indicators, Indian Railway is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with NMDC Steel and Indian Railway

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

The idea behind NMDC Steel Limited and Indian Railway Finance 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.