Correlation Between Larsen Toubro and Indian Metals

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

Diversification Opportunities for Larsen Toubro and Indian Metals

0.83

Correlation Coefficient

Larsen Toubro  Indian Metals

Very poor diversification

The 3 months correlation between Larsen and Indian is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and Indian Metals Ferro in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Indian Metals Ferro 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 Indian Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Indian Metals Ferro has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and Indian Metals go up and down completely randomly.

Pair Corralation between Larsen Toubro and Indian Metals

Assuming the 90 days trading horizon Larsen Toubro Limited is expected to generate 0.61 times more return on investment than Indian Metals. However, Larsen Toubro Limited is 1.63 times less risky than Indian Metals. It trades about -0.01 of its potential returns per unit of risk. Indian Metals Ferro is currently generating about -0.15 per unit of risk. If you would invest  357,895  in Larsen Toubro Limited on December 30, 2024 and sell it today you would lose (8,665) from holding Larsen Toubro Limited or give up 2.42% of portfolio value over 90 days.

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

Larsen Toubro Limited  vs.  Indian Metals Ferro

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

Indian Metals Ferro

Risk-Adjusted Performance

Very Weak

Over the last 90 days Indian Metals Ferro has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Larsen Toubro and Indian Metals

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

The idea behind Larsen Toubro Limited and Indian Metals Ferro 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..