Correlation Between Lemon Tree and Reliance Industries

Can any of the company-specific risk be diversified away by investing in both Lemon Tree and Reliance 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 Reliance 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 Reliance Industries Limited, you can compare the effects of market volatilities on Lemon Tree and Reliance 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 Reliance Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lemon Tree and Reliance Industries.

Diversification Opportunities for Lemon Tree and Reliance Industries

-0.7

Correlation Coefficient

Lemon Tree  Reliance Industries

Excellent diversification

The 3 months correlation between Lemon and Reliance is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding Lemon Tree Hotels and Reliance Industries Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reliance 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 Reliance Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reliance Industries has no effect on the direction of Lemon Tree i.e., Lemon Tree and Reliance Industries go up and down completely randomly.

Pair Corralation between Lemon Tree and Reliance Industries

Assuming the 90 days trading horizon Lemon Tree is expected to generate 11.1 times less return on investment than Reliance Industries. But when comparing it to its historical volatility, Lemon Tree Hotels is 5.77 times less risky than Reliance Industries. It trades about 0.02 of its potential returns per unit of risk. Reliance Industries Limited is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  138,358  in Reliance Industries Limited on October 10, 2024 and sell it today you would lose (11,808) from holding Reliance Industries Limited or give up 8.53% of portfolio value over 90 days.

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

Lemon Tree Hotels  vs.  Reliance Industries Limited

Lemon Tree Hotels

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lemon Tree Hotels are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain basic indicators, Lemon Tree reported solid returns over the last few months and may actually be approaching a breakup point.

Reliance Industries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Reliance Industries Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest inconsistent performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Lemon Tree and Reliance Industries

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

The idea behind Lemon Tree Hotels and Reliance 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.