Correlation Between Larsen Toubro and China Energy

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

Diversification Opportunities for Larsen Toubro and China Energy

-0.08

Correlation Coefficient

Larsen Toubro  China Energy

Good diversification

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

Pair Corralation between Larsen Toubro and China Energy

Assuming the 90 days horizon Larsen Toubro Limited is expected to under-perform the China Energy. But the stock apears to be less risky and, when comparing its historical volatility, Larsen Toubro Limited is 2.08 times less risky than China Energy. The stock trades about -0.09 of its potential returns per unit of risk. The China Energy Engineering is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  12.00  in China Energy Engineering on December 2, 2024 and sell it today you would earn a total of  0.00  from holding China Energy Engineering or generate 0.0% return on investment over 90 days.

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

Larsen Toubro Limited  vs.  China Energy Engineering

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. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

China Energy Engineering

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Energy Engineering are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Energy may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Larsen Toubro and China Energy

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

The idea behind Larsen Toubro Limited and China Energy Engineering 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.

Check out your portfolio center.

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.