Correlation Between REC and Power Finance

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

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

Diversification Opportunities for REC and Power Finance

0.87

Correlation Coefficient

REC  Power Finance

Very poor diversification

The 3 months correlation between REC and Power is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding REC Limited and Power Finance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Power Finance and REC 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 REC Limited are associated (or correlated) with Power Finance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Power Finance has no effect on the direction of REC i.e., REC and Power Finance go up and down completely randomly.

Pair Corralation between REC and Power Finance

Assuming the 90 days trading horizon REC Limited is expected to under-perform the Power Finance. But the stock apears to be less risky and, when comparing its historical volatility, REC Limited is 1.12 times less risky than Power Finance. The stock trades about -0.1 of its potential returns per unit of risk. The Power Finance is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  55,123  in Power Finance on September 4, 2024 and sell it today you would lose (5,548) from holding Power Finance or give up 10.06% of portfolio value over 90 days.

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

REC Limited  vs.  Power Finance

REC Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days REC Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's essential indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Power Finance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Power Finance 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.

Pair Trading with REC and Power Finance

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

The idea behind REC Limited and Power 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.