Correlation Between MRF and Sonata Software

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

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

Diversification Opportunities for MRF and Sonata Software

0.46

Correlation Coefficient

MRF  Sonata Software

Very weak diversification

The 3 months correlation between MRF and Sonata is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding MRF Limited and Sonata Software Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sonata Software 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 Sonata Software. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sonata Software has no effect on the direction of MRF i.e., MRF and Sonata Software go up and down completely randomly.

Pair Corralation between MRF and Sonata Software

Assuming the 90 days trading horizon MRF Limited is expected to under-perform the Sonata Software. But the stock apears to be less risky and, when comparing its historical volatility, MRF Limited is 2.39 times less risky than Sonata Software. The stock trades about -0.05 of its potential returns per unit of risk. The Sonata Software Limited is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  59,500  in Sonata Software Limited on October 6, 2024 and sell it today you would earn a total of  3,365  from holding Sonata Software Limited or generate 5.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	96.83%
Values	Daily Returns

MRF Limited  vs.  Sonata Software 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 recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Sonata Software

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Sonata Software Limited are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, Sonata Software may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with MRF and Sonata Software

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

The idea behind MRF Limited and Sonata Software 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.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.