Correlation Between HDFC Bank and Bajaj Finance

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

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

Diversification Opportunities for HDFC Bank and Bajaj Finance

-0.3

Correlation Coefficient

HDFC Bank  Bajaj Finance

Very good diversification

The 3 months correlation between HDFC and Bajaj is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding HDFC Bank Limited and Bajaj Finance Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bajaj Finance Limited and HDFC Bank 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 HDFC Bank Limited are associated (or correlated) with Bajaj Finance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bajaj Finance Limited has no effect on the direction of HDFC Bank i.e., HDFC Bank and Bajaj Finance go up and down completely randomly.

Pair Corralation between HDFC Bank and Bajaj Finance

Assuming the 90 days trading horizon HDFC Bank Limited is expected to generate 0.65 times more return on investment than Bajaj Finance. However, HDFC Bank Limited is 1.54 times less risky than Bajaj Finance. It trades about 0.55 of its potential returns per unit of risk. Bajaj Finance Limited is currently generating about 0.29 per unit of risk. If you would invest  168,135  in HDFC Bank Limited on September 14, 2024 and sell it today you would earn a total of  17,790  from holding HDFC Bank Limited or generate 10.58% return on investment over 90 days.

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

HDFC Bank Limited  vs.  Bajaj Finance Limited

HDFC Bank Limited

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, HDFC Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Bajaj Finance Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bajaj Finance Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Bajaj Finance is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with HDFC Bank and Bajaj Finance

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

The idea behind HDFC Bank Limited and Bajaj Finance 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.