Correlation Between NIFTY SUMER and Reliance Power

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

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

Diversification Opportunities for NIFTY SUMER and Reliance Power

0.7

Correlation Coefficient

NIFTY SUMER  Reliance Power

Poor diversification

The 3 months correlation between NIFTY and Reliance is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding NIFTY SUMER DURABLES and Reliance Power Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reliance Power and NIFTY SUMER 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 NIFTY SUMER DURABLES are associated (or correlated) with Reliance Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reliance Power has no effect on the direction of NIFTY SUMER i.e., NIFTY SUMER and Reliance Power go up and down completely randomly.

Pair Corralation between NIFTY SUMER and Reliance Power

Assuming the 90 days trading horizon NIFTY SUMER is expected to generate 3.21 times less return on investment than Reliance Power. But when comparing it to its historical volatility, NIFTY SUMER DURABLES is 3.92 times less risky than Reliance Power. It trades about 0.12 of its potential returns per unit of risk. Reliance Power Limited is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,070  in Reliance Power Limited on October 23, 2024 and sell it today you would earn a total of  3,136  from holding Reliance Power Limited or generate 293.08% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.92%
Values	Daily Returns

NIFTY SUMER DURABLES  vs.  Reliance Power Limited

Pair Trading with NIFTY SUMER and Reliance Power

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

The idea behind NIFTY SUMER DURABLES and Reliance Power 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.