Correlation Between Honeywell International and HDFC Bank

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

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

Diversification Opportunities for Honeywell International and HDFC Bank

0.84

Correlation Coefficient

Honeywell International  HDFC Bank

Very poor diversification

The 3 months correlation between Honeywell and HDFC is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Honeywell International and HDFC Bank Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HDFC Bank Limited and Honeywell International 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 Honeywell International are associated (or correlated) with HDFC Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HDFC Bank Limited has no effect on the direction of Honeywell International i.e., Honeywell International and HDFC Bank go up and down completely randomly.

Pair Corralation between Honeywell International and HDFC Bank

Assuming the 90 days trading horizon Honeywell International is expected to generate 1.47 times less return on investment than HDFC Bank. But when comparing it to its historical volatility, Honeywell International is 1.79 times less risky than HDFC Bank. It trades about 0.07 of its potential returns per unit of risk. HDFC Bank Limited is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  5,800  in HDFC Bank Limited on October 17, 2024 and sell it today you would earn a total of  1,228  from holding HDFC Bank Limited or generate 21.17% return on investment over 90 days.

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

Honeywell International  vs.  HDFC Bank Limited

Honeywell International

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Honeywell International are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Honeywell International sustained solid returns over the last few months and may actually be approaching a breakup point.

HDFC Bank Limited

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, HDFC Bank may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Honeywell International and HDFC Bank

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

The idea behind Honeywell International and HDFC Bank 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.