Correlation Between Lemon Tree and Praj Industries

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

By analyzing existing cross correlation between Lemon Tree Hotels and Praj Industries Limited, you can compare the effects of market volatilities on Lemon Tree and Praj Industries 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 Lemon Tree with a short position of Praj Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lemon Tree and Praj Industries.

Diversification Opportunities for Lemon Tree and Praj Industries

0.74

Correlation Coefficient

Lemon Tree  Praj Industries

Poor diversification

The 3 months correlation between Lemon and Praj is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Lemon Tree Hotels and Praj Industries Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Praj Industries and Lemon Tree 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 Lemon Tree Hotels are associated (or correlated) with Praj Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Praj Industries has no effect on the direction of Lemon Tree i.e., Lemon Tree and Praj Industries go up and down completely randomly.

Pair Corralation between Lemon Tree and Praj Industries

Assuming the 90 days trading horizon Lemon Tree is expected to generate 2.65 times less return on investment than Praj Industries. But when comparing it to its historical volatility, Lemon Tree Hotels is 1.2 times less risky than Praj Industries. It trades about 0.05 of its potential returns per unit of risk. Praj Industries Limited is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  47,897  in Praj Industries Limited on October 7, 2024 and sell it today you would earn a total of  35,738  from holding Praj Industries Limited or generate 74.61% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.55%
Values	Daily Returns

Lemon Tree Hotels  vs.  Praj Industries Limited

Lemon Tree Hotels

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lemon Tree Hotels are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Lemon Tree reported solid returns over the last few months and may actually be approaching a breakup point.

Praj Industries

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Praj Industries Limited are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating forward indicators, Praj Industries exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lemon Tree and Praj Industries

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

The idea behind Lemon Tree Hotels and Praj Industries 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.