Correlation Between HDFC Bank and Energy Development

Can any of the company-specific risk be diversified away by investing in both HDFC Bank and Energy Development 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 Energy Development 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 Energy Development, you can compare the effects of market volatilities on HDFC Bank and Energy Development 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 Energy Development. Check out your portfolio center. Please also check ongoing floating volatility patterns of HDFC Bank and Energy Development.

Diversification Opportunities for HDFC Bank and Energy Development

0.72

Correlation Coefficient

HDFC Bank  Energy Development

Poor diversification

The 3 months correlation between HDFC and Energy is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding HDFC Bank Limited and Energy Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Development 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 Energy Development. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Development has no effect on the direction of HDFC Bank i.e., HDFC Bank and Energy Development go up and down completely randomly.

Pair Corralation between HDFC Bank and Energy Development

Assuming the 90 days trading horizon HDFC Bank is expected to generate 5.0 times less return on investment than Energy Development. But when comparing it to its historical volatility, HDFC Bank Limited is 2.7 times less risky than Energy Development. It trades about 0.02 of its potential returns per unit of risk. Energy Development is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,990  in Energy Development on October 9, 2024 and sell it today you would earn a total of  613.00  from holding Energy Development or generate 30.8% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.79%
Values	Daily Returns

HDFC Bank Limited  vs.  Energy Development

HDFC Bank Limited

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, HDFC Bank is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Energy Development

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Development are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak fundamental indicators, Energy Development may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with HDFC Bank and Energy Development

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

The idea behind HDFC Bank Limited and Energy Development 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.