Correlation Between Home First and Sonata Software

Can any of the company-specific risk be diversified away by investing in both Home First and Sonata Software 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 Home First and Sonata Software into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Home First and Sonata Software

0.76

Correlation Coefficient

Home First  Sonata Software

Poor diversification

The 3 months correlation between Home and Sonata is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Home First Finance and Sonata Software Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sonata Software and Home First 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 Home First Finance are associated (or correlated) with Sonata Software. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sonata Software has no effect on the direction of Home First i.e., Home First and Sonata Software go up and down completely randomly.

Pair Corralation between Home First and Sonata Software

Assuming the 90 days trading horizon Home First Finance is expected to generate 0.67 times more return on investment than Sonata Software. However, Home First Finance is 1.49 times less risky than Sonata Software. It trades about -0.16 of its potential returns per unit of risk. Sonata Software Limited is currently generating about -0.34 per unit of risk. If you would invest  96,195  in Home First Finance on November 29, 2024 and sell it today you would lose (7,695) from holding Home First Finance or give up 8.0% of portfolio value over 90 days.

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

Home First Finance  vs.  Sonata Software Limited

Home First Finance

Risk-Adjusted Performance

Very Weak

Over the last 90 days Home First Finance has generated negative risk-adjusted returns adding no value to investors with long positions. Even with unsteady performance in the last few months, the Stock's basic indicators remain relatively invariable which may send shares a bit higher in March 2025. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

Sonata Software

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sonata Software Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's technical and fundamental indicators remain very healthy which may send shares a bit higher in March 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Home First and Sonata Software

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

The idea behind Home First Finance and Sonata Software 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.