Correlation Between Larsen Toubro and Digjam

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

Diversification Opportunities for Larsen Toubro and Digjam

0.41

Correlation Coefficient

Larsen Toubro  Digjam

Very weak diversification

The 3 months correlation between Larsen and Digjam is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and Digjam Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digjam 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 Digjam. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digjam Limited has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and Digjam go up and down completely randomly.

Pair Corralation between Larsen Toubro and Digjam

Assuming the 90 days trading horizon Larsen Toubro Limited is expected to generate 0.52 times more return on investment than Digjam. However, Larsen Toubro Limited is 1.91 times less risky than Digjam. It trades about 0.21 of its potential returns per unit of risk. Digjam Limited is currently generating about -0.02 per unit of risk. If you would invest  350,590  in Larsen Toubro Limited on September 20, 2024 and sell it today you would earn a total of  25,225  from holding Larsen Toubro Limited or generate 7.2% return on investment over 90 days.

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

Larsen Toubro Limited  vs.  Digjam Limited

Larsen Toubro Limited

Risk-Adjusted Performance

0 of 100

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 rather sound basic indicators, Larsen Toubro is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Digjam Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digjam Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent primary indicators, Digjam is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Larsen Toubro and Digjam

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

The idea behind Larsen Toubro Limited and Digjam 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.