Correlation Between Larsen Toubro and Selan Exploration

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

Diversification Opportunities for Larsen Toubro and Selan Exploration

0.6

Correlation Coefficient

Larsen Toubro  Selan Exploration

Poor diversification

The 3 months correlation between Larsen and Selan is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Larsen Toubro Limited and Selan Exploration Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Selan Exploration 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 Selan Exploration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Selan Exploration has no effect on the direction of Larsen Toubro i.e., Larsen Toubro and Selan Exploration go up and down completely randomly.

Pair Corralation between Larsen Toubro and Selan Exploration

Assuming the 90 days trading horizon Larsen Toubro is expected to generate 7.85 times less return on investment than Selan Exploration. But when comparing it to its historical volatility, Larsen Toubro Limited is 2.2 times less risky than Selan Exploration. It trades about 0.02 of its potential returns per unit of risk. Selan Exploration Technology is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  50,160  in Selan Exploration Technology on October 22, 2024 and sell it today you would earn a total of  28,525  from holding Selan Exploration Technology or generate 56.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.56%
Values	Daily Returns

Larsen Toubro Limited  vs.  Selan Exploration Technology

Larsen Toubro Limited

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Larsen Toubro Limited are ranked lower than 2 (%) 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 newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Selan Exploration

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Selan Exploration Technology has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy essential indicators, Selan Exploration is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Larsen Toubro and Selan Exploration

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

The idea behind Larsen Toubro Limited and Selan Exploration Technology 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.