Correlation Between HDFC Bank and Tech Mahindra

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

Diversification Opportunities for HDFC Bank and Tech Mahindra

0.79

Correlation Coefficient

HDFC Bank  Tech Mahindra

Poor diversification

The 3 months correlation between HDFC and Tech is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding HDFC Bank Limited and Tech Mahindra Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tech Mahindra 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 Tech Mahindra. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tech Mahindra Limited has no effect on the direction of HDFC Bank i.e., HDFC Bank and Tech Mahindra go up and down completely randomly.

Pair Corralation between HDFC Bank and Tech Mahindra

Assuming the 90 days trading horizon HDFC Bank Limited is expected to under-perform the Tech Mahindra. But the stock apears to be less risky and, when comparing its historical volatility, HDFC Bank Limited is 1.29 times less risky than Tech Mahindra. The stock trades about -0.46 of its potential returns per unit of risk. The Tech Mahindra Limited is currently generating about -0.2 of returns per unit of risk over similar time horizon. If you would invest  176,355  in Tech Mahindra Limited on October 11, 2024 and sell it today you would lose (9,980) from holding Tech Mahindra Limited or give up 5.66% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

HDFC Bank Limited  vs.  Tech Mahindra Limited

HDFC Bank Limited

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 3 (%) 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 current stock price disarray, may contribute to short-term losses for the investors.

Tech Mahindra Limited

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Tech Mahindra Limited are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, Tech Mahindra is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with HDFC Bank and Tech Mahindra

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

The idea behind HDFC Bank Limited and Tech Mahindra 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.

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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.