Correlation Between Larsen Toubro and HDFC Bank

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

Diversification Opportunities for Larsen Toubro and HDFC Bank

0.74

Correlation Coefficient

Larsen Toubro  HDFC Bank

Poor diversification

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

Pair Corralation between Larsen Toubro and HDFC Bank

Assuming the 90 days trading horizon Larsen Toubro Limited is expected to generate 1.65 times more return on investment than HDFC Bank. However, Larsen Toubro is 1.65 times more volatile than HDFC Bank Limited. It trades about 0.21 of its potential returns per unit of risk. HDFC Bank Limited is currently generating about 0.19 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	Significant
Accuracy	100.0%
Values	Daily Returns

Larsen Toubro Limited  vs.  HDFC Bank 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.

HDFC Bank Limited

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, HDFC Bank is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Larsen Toubro and HDFC Bank

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

The idea behind Larsen Toubro Limited and HDFC Bank 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.