Correlation Between Larsen Toubro and Reliance Industries

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

Diversification Opportunities for Larsen Toubro and Reliance Industries

0.08

Correlation Coefficient

Larsen Toubro  Reliance Industries

Significant diversification

The 3 months correlation between Larsen and Reliance is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and Reliance Industries Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reliance Industries 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 Reliance Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reliance Industries has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and Reliance Industries go up and down completely randomly.

Pair Corralation between Larsen Toubro and Reliance Industries

Assuming the 90 days trading horizon Larsen Toubro Limited is expected to generate 1.12 times more return on investment than Reliance Industries. However, Larsen Toubro is 1.12 times more volatile than Reliance Industries Limited. It trades about 0.31 of its potential returns per unit of risk. Reliance Industries Limited is currently generating about 0.02 per unit of risk. If you would invest  352,625  in Larsen Toubro Limited on September 15, 2024 and sell it today you would earn a total of  36,075  from holding Larsen Toubro Limited or generate 10.23% return on investment over 90 days.

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

Larsen Toubro Limited  vs.  Reliance Industries Limited

Larsen Toubro Limited

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Larsen Toubro Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Larsen Toubro may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Reliance Industries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Reliance Industries 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 January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Larsen Toubro and Reliance Industries

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

The idea behind Larsen Toubro Limited and Reliance Industries 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.