Correlation Between Tarapur Transformers and Lemon Tree

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

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

Diversification Opportunities for Tarapur Transformers and Lemon Tree

0.83

Correlation Coefficient

Tarapur Transformers  Lemon Tree

Very poor diversification

The 3 months correlation between Tarapur and Lemon is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Tarapur Transformers Limited and Lemon Tree Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lemon Tree Hotels and Tarapur Transformers 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 Tarapur Transformers Limited are associated (or correlated) with Lemon Tree. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lemon Tree Hotels has no effect on the direction of Tarapur Transformers i.e., Tarapur Transformers and Lemon Tree go up and down completely randomly.

Pair Corralation between Tarapur Transformers and Lemon Tree

Assuming the 90 days trading horizon Tarapur Transformers Limited is expected to generate 1.76 times more return on investment than Lemon Tree. However, Tarapur Transformers is 1.76 times more volatile than Lemon Tree Hotels. It trades about 0.4 of its potential returns per unit of risk. Lemon Tree Hotels is currently generating about 0.49 per unit of risk. If you would invest  2,961  in Tarapur Transformers Limited on September 25, 2024 and sell it today you would earn a total of  1,497  from holding Tarapur Transformers Limited or generate 50.56% return on investment over 90 days.

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

Tarapur Transformers Limited  vs.  Lemon Tree Hotels

Tarapur Transformers

Risk-Adjusted Performance

36 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Tarapur Transformers Limited are ranked lower than 36 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Tarapur Transformers reported solid returns over the last few months and may actually be approaching a breakup point.

Lemon Tree Hotels

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lemon Tree Hotels are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting basic indicators, Lemon Tree reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tarapur Transformers and Lemon Tree

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

The idea behind Tarapur Transformers Limited and Lemon Tree Hotels 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.