Correlation Between HDFC Bank and HDFC Life

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

Diversification Opportunities for HDFC Bank and HDFC Life

-0.2

Correlation Coefficient

HDFC Bank  HDFC Life

Good diversification

The 3 months correlation between HDFC and HDFC is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding HDFC Bank Limited and HDFC Life Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HDFC Life Insurance 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 HDFC Life. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HDFC Life Insurance has no effect on the direction of HDFC Bank i.e., HDFC Bank and HDFC Life go up and down completely randomly.

Pair Corralation between HDFC Bank and HDFC Life

Assuming the 90 days trading horizon HDFC Bank Limited is expected to under-perform the HDFC Life. But the stock apears to be less risky and, when comparing its historical volatility, HDFC Bank Limited is 2.06 times less risky than HDFC Life. The stock trades about -0.49 of its potential returns per unit of risk. The HDFC Life Insurance is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  62,255  in HDFC Life Insurance on October 22, 2024 and sell it today you would earn a total of  1,965  from holding HDFC Life Insurance or generate 3.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.0%
Values	Daily Returns

HDFC Bank Limited  vs.  HDFC Life Insurance

HDFC Bank Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days HDFC Bank Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, HDFC Bank is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

HDFC Life Insurance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days HDFC Life Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's forward indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with HDFC Bank and HDFC Life

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

The idea behind HDFC Bank Limited and HDFC Life Insurance 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.