Correlation Between Indus and Lucky Cement

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

By analyzing existing cross correlation between Indus Motor and Lucky Cement, you can compare the effects of market volatilities on Indus and Lucky Cement 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 Indus with a short position of Lucky Cement. Check out your portfolio center. Please also check ongoing floating volatility patterns of Indus and Lucky Cement.

Diversification Opportunities for Indus and Lucky Cement

0.27

Correlation Coefficient

Indus  Lucky Cement

Modest diversification

The 3 months correlation between Indus and Lucky is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Indus Motor and Lucky Cement in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lucky Cement and Indus 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 Indus Motor are associated (or correlated) with Lucky Cement. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lucky Cement has no effect on the direction of Indus i.e., Indus and Lucky Cement go up and down completely randomly.

Pair Corralation between Indus and Lucky Cement

Assuming the 90 days trading horizon Indus Motor is expected to under-perform the Lucky Cement. But the stock apears to be less risky and, when comparing its historical volatility, Indus Motor is 2.24 times less risky than Lucky Cement. The stock trades about -0.03 of its potential returns per unit of risk. The Lucky Cement is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  109,895  in Lucky Cement on December 30, 2024 and sell it today you would earn a total of  39,765  from holding Lucky Cement or generate 36.18% return on investment over 90 days.

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

Indus Motor  vs.  Lucky Cement

Indus Motor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Indus Motor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Indus is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Lucky Cement

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lucky Cement are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lucky Cement sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Indus and Lucky Cement

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

The idea behind Indus Motor and Lucky Cement 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.