Correlation Between TMT Steel and Tata Steel

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

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

Diversification Opportunities for TMT Steel and Tata Steel

0.37

Correlation Coefficient

TMT Steel  Tata Steel

Weak diversification

The 3 months correlation between TMT and Tata is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding TMT Steel Public and Tata Steel Public in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tata Steel Public and TMT 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 TMT Steel Public are associated (or correlated) with Tata Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tata Steel Public has no effect on the direction of TMT Steel i.e., TMT Steel and Tata Steel go up and down completely randomly.

Pair Corralation between TMT Steel and Tata Steel

Assuming the 90 days trading horizon TMT Steel Public is expected to under-perform the Tata Steel. But the stock apears to be less risky and, when comparing its historical volatility, TMT Steel Public is 1.05 times less risky than Tata Steel. The stock trades about -0.13 of its potential returns per unit of risk. The Tata Steel Public is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  64.00  in Tata Steel Public on September 13, 2024 and sell it today you would earn a total of  7.00  from holding Tata Steel Public or generate 10.94% return on investment over 90 days.

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

TMT Steel Public  vs.  Tata Steel Public

TMT Steel Public

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days TMT Steel Public has generated negative risk-adjusted returns adding no value to investors with long positions. Despite conflicting performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Tata Steel Public

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Tata Steel Public are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting forward-looking signals, Tata Steel disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with TMT Steel and Tata Steel

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

The idea behind TMT Steel Public and Tata Steel Public 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.