Correlation Between MRF and Larsen Toubro

Can any of the company-specific risk be diversified away by investing in both MRF and Larsen Toubro 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 MRF and Larsen Toubro into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between MRF Limited and Larsen Toubro Limited, you can compare the effects of market volatilities on MRF and Larsen Toubro 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 MRF with a short position of Larsen Toubro. Check out your portfolio center. Please also check ongoing floating volatility patterns of MRF and Larsen Toubro.

Diversification Opportunities for MRF and Larsen Toubro

0.41

Correlation Coefficient

MRF  Larsen Toubro

Very weak diversification

The 3 months correlation between MRF and Larsen is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding MRF Limited and Larsen Toubro Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Larsen Toubro Limited and MRF 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 MRF Limited are associated (or correlated) with Larsen Toubro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Larsen Toubro Limited has no effect on the direction of MRF i.e., MRF and Larsen Toubro go up and down completely randomly.

Pair Corralation between MRF and Larsen Toubro

Assuming the 90 days trading horizon MRF Limited is expected to generate 0.83 times more return on investment than Larsen Toubro. However, MRF Limited is 1.2 times less risky than Larsen Toubro. It trades about 0.21 of its potential returns per unit of risk. Larsen Toubro Limited is currently generating about -0.11 per unit of risk. If you would invest  12,449,200  in MRF Limited on September 24, 2024 and sell it today you would earn a total of  585,400  from holding MRF Limited or generate 4.7% return on investment over 90 days.

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

MRF Limited  vs.  Larsen Toubro Limited

MRF Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MRF Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, MRF is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

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.

Pair Trading with MRF and Larsen Toubro

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

The idea behind MRF Limited and Larsen Toubro 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.