Correlation Between CEAT and Nippon Life

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

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

Diversification Opportunities for CEAT and Nippon Life

-0.33

Correlation Coefficient

CEAT  Nippon Life

Very good diversification

The 3 months correlation between CEAT and Nippon is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding CEAT Limited and Nippon Life India in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nippon Life India and CEAT 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 CEAT Limited are associated (or correlated) with Nippon Life. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nippon Life India has no effect on the direction of CEAT i.e., CEAT and Nippon Life go up and down completely randomly.

Pair Corralation between CEAT and Nippon Life

Assuming the 90 days trading horizon CEAT Limited is expected to generate 0.81 times more return on investment than Nippon Life. However, CEAT Limited is 1.24 times less risky than Nippon Life. It trades about 0.07 of its potential returns per unit of risk. Nippon Life India is currently generating about 0.04 per unit of risk. If you would invest  275,630  in CEAT Limited on August 30, 2024 and sell it today you would earn a total of  21,655  from holding CEAT Limited or generate 7.86% return on investment over 90 days.

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

CEAT Limited  vs.  Nippon Life India

CEAT Limited

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in CEAT Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain essential indicators, CEAT may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Nippon Life India

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Nippon Life India are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Nippon Life is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with CEAT and Nippon Life

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

The idea behind CEAT Limited and Nippon Life India 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.