Correlation Between Pakistan Tobacco and Reliance Weaving

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

By analyzing existing cross correlation between Pakistan Tobacco and Reliance Weaving Mills, you can compare the effects of market volatilities on Pakistan Tobacco and Reliance Weaving 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 Pakistan Tobacco with a short position of Reliance Weaving. Check out your portfolio center. Please also check ongoing floating volatility patterns of Pakistan Tobacco and Reliance Weaving.

Diversification Opportunities for Pakistan Tobacco and Reliance Weaving

-0.84

Correlation Coefficient

Pakistan Tobacco  Reliance Weaving

Pay attention - limited upside

The 3 months correlation between Pakistan and Reliance is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding Pakistan Tobacco and Reliance Weaving Mills in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reliance Weaving Mills and Pakistan Tobacco 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 Pakistan Tobacco are associated (or correlated) with Reliance Weaving. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reliance Weaving Mills has no effect on the direction of Pakistan Tobacco i.e., Pakistan Tobacco and Reliance Weaving go up and down completely randomly.

Pair Corralation between Pakistan Tobacco and Reliance Weaving

Assuming the 90 days trading horizon Pakistan Tobacco is expected to under-perform the Reliance Weaving. But the stock apears to be less risky and, when comparing its historical volatility, Pakistan Tobacco is 1.24 times less risky than Reliance Weaving. The stock trades about -0.1 of its potential returns per unit of risk. The Reliance Weaving Mills is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  15,000  in Reliance Weaving Mills on December 25, 2024 and sell it today you would lose (100.00) from holding Reliance Weaving Mills or give up 0.67% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	68.85%
Values	Daily Returns

Pakistan Tobacco  vs.  Reliance Weaving Mills

Pakistan Tobacco

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pakistan Tobacco has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Reliance Weaving Mills

Risk-Adjusted Performance

Very Weak

Over the last 90 days Reliance Weaving Mills has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Reliance Weaving is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Pakistan Tobacco and Reliance Weaving

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

The idea behind Pakistan Tobacco and Reliance Weaving Mills 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.