Correlation Between Larsen Toubro and Coal India

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

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

Diversification Opportunities for Larsen Toubro and Coal India

0.84

Correlation Coefficient

Larsen Toubro  Coal India

Very poor diversification

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

Pair Corralation between Larsen Toubro and Coal India

Assuming the 90 days trading horizon Larsen Toubro Limited is expected to under-perform the Coal India. But the stock apears to be less risky and, when comparing its historical volatility, Larsen Toubro Limited is 1.01 times less risky than Coal India. The stock trades about -0.18 of its potential returns per unit of risk. The Coal India Limited is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  40,798  in Coal India Limited on December 8, 2024 and sell it today you would lose (2,733) from holding Coal India Limited or give up 6.7% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Larsen Toubro Limited  vs.  Coal India Limited

Larsen Toubro Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days Larsen Toubro Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Coal India Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days Coal India Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Coal India is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Larsen Toubro and Coal India

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

The idea behind Larsen Toubro Limited and Coal India 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.