Correlation Between Nippon Life and CEAT

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

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

Diversification Opportunities for Nippon Life and CEAT

0.86

Correlation Coefficient

Nippon Life  CEAT

Very poor diversification

The 3 months correlation between Nippon and CEAT is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Nippon Life India and CEAT Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CEAT Limited and Nippon Life 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 Nippon Life India are associated (or correlated) with CEAT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CEAT Limited has no effect on the direction of Nippon Life i.e., Nippon Life and CEAT go up and down completely randomly.

Pair Corralation between Nippon Life and CEAT

Assuming the 90 days trading horizon Nippon Life India is expected to under-perform the CEAT. In addition to that, Nippon Life is 1.22 times more volatile than CEAT Limited. It trades about -0.12 of its total potential returns per unit of risk. CEAT Limited is currently generating about -0.05 per unit of volatility. If you would invest  297,285  in CEAT Limited on November 28, 2024 and sell it today you would lose (27,040) from holding CEAT Limited or give up 9.1% of portfolio value over 90 days.

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

Nippon Life India  vs.  CEAT Limited

Nippon Life India

Risk-Adjusted Performance

Very Weak

Over the last 90 days Nippon Life India has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in March 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

CEAT Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days CEAT Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's essential indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Nippon Life and CEAT

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

The idea behind Nippon Life India and CEAT 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.