Correlation Between Larsen Toubro and Hindustan Construction

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

Diversification Opportunities for Larsen Toubro and Hindustan Construction

0.72

Correlation Coefficient

Larsen Toubro  Hindustan Construction

Poor diversification

The 3 months correlation between Larsen and Hindustan is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and Hindustan Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hindustan Construction 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 Hindustan Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hindustan Construction has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and Hindustan Construction go up and down completely randomly.

Pair Corralation between Larsen Toubro and Hindustan Construction

Assuming the 90 days trading horizon Larsen Toubro is expected to generate 3.58 times less return on investment than Hindustan Construction. But when comparing it to its historical volatility, Larsen Toubro Limited is 2.17 times less risky than Hindustan Construction. It trades about 0.02 of its potential returns per unit of risk. Hindustan Construction is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  3,490  in Hindustan Construction on October 7, 2024 and sell it today you would earn a total of  548.00  from holding Hindustan Construction or generate 15.7% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.59%
Values	Daily Returns

Larsen Toubro Limited  vs.  Hindustan Construction

Larsen Toubro Limited

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Larsen Toubro Limited are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Larsen Toubro is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Hindustan Construction

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Hindustan Construction are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak technical and fundamental indicators, Hindustan Construction may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Larsen Toubro and Hindustan Construction

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

The idea behind Larsen Toubro Limited and Hindustan Construction 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.