Correlation Between Reliance Industries and REC

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

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

Diversification Opportunities for Reliance Industries and REC

0.41

Correlation Coefficient

Reliance Industries  REC

Very weak diversification

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

Pair Corralation between Reliance Industries and REC

Assuming the 90 days trading horizon Reliance Industries Limited is expected to under-perform the REC. But the stock apears to be less risky and, when comparing its historical volatility, Reliance Industries Limited is 1.75 times less risky than REC. The stock trades about -0.13 of its potential returns per unit of risk. The REC Limited is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  54,420  in REC Limited on October 24, 2024 and sell it today you would lose (6,775) from holding REC Limited or give up 12.45% of portfolio value over 90 days.

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

Reliance Industries Limited  vs.  REC Limited

Reliance Industries

Risk-Adjusted Performance

0 of 100

Very Weak

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

REC Limited

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Reliance Industries and REC

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

The idea behind Reliance Industries Limited and REC 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.