Correlation Between Indian Railway and ITI

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

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

Diversification Opportunities for Indian Railway and ITI

0.42

Correlation Coefficient

Indian Railway  ITI

Very weak diversification

The 3 months correlation between Indian and ITI is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Indian Railway Finance and ITI Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ITI Limited and Indian Railway 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 Indian Railway Finance are associated (or correlated) with ITI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ITI Limited has no effect on the direction of Indian Railway i.e., Indian Railway and ITI go up and down completely randomly.

Pair Corralation between Indian Railway and ITI

Assuming the 90 days trading horizon Indian Railway is expected to generate 15.5 times less return on investment than ITI. But when comparing it to its historical volatility, Indian Railway Finance is 2.43 times less risky than ITI. It trades about 0.03 of its potential returns per unit of risk. ITI Limited is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  27,884  in ITI Limited on September 26, 2024 and sell it today you would earn a total of  6,491  from holding ITI Limited or generate 23.28% return on investment over 90 days.

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

Indian Railway Finance  vs.  ITI Limited

Indian Railway Finance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Indian Railway Finance has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Indian Railway is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

ITI Limited

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ITI Limited are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, ITI exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Indian Railway and ITI

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

The idea behind Indian Railway Finance and ITI 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .