Correlation Between GM Breweries and Tata Chemicals

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

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

Diversification Opportunities for GM Breweries and Tata Chemicals

0.14

Correlation Coefficient

GM Breweries  Tata Chemicals

Average diversification

The 3 months correlation between GMBREW and Tata is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding GM Breweries Limited and Tata Chemicals Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tata Chemicals and GM Breweries 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 GM Breweries Limited are associated (or correlated) with Tata Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tata Chemicals has no effect on the direction of GM Breweries i.e., GM Breweries and Tata Chemicals go up and down completely randomly.

Pair Corralation between GM Breweries and Tata Chemicals

Assuming the 90 days trading horizon GM Breweries Limited is expected to generate 1.36 times more return on investment than Tata Chemicals. However, GM Breweries is 1.36 times more volatile than Tata Chemicals Limited. It trades about 0.12 of its potential returns per unit of risk. Tata Chemicals Limited is currently generating about -0.28 per unit of risk. If you would invest  80,805  in GM Breweries Limited on October 5, 2024 and sell it today you would earn a total of  3,870  from holding GM Breweries Limited or generate 4.79% return on investment over 90 days.

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

GM Breweries Limited  vs.  Tata Chemicals Limited

GM Breweries Limited

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in GM Breweries Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, GM Breweries is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Tata Chemicals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tata Chemicals Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical indicators, Tata Chemicals is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with GM Breweries and Tata Chemicals

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

The idea behind GM Breweries Limited and Tata Chemicals Limited 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.