Correlation Between Reliance Industries and Tata Steel

Can any of the company-specific risk be diversified away by investing in both Reliance Industries and Tata Steel 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 Tata Steel 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 Tata Steel Limited, you can compare the effects of market volatilities on Reliance Industries and Tata Steel 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 Tata Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Reliance Industries and Tata Steel.

Diversification Opportunities for Reliance Industries and Tata Steel

0.62

Correlation Coefficient

Reliance Industries  Tata Steel

Poor diversification

The 3 months correlation between Reliance and Tata is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Reliance Industries Limited and Tata Steel Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tata Steel 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 Tata Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tata Steel Limited has no effect on the direction of Reliance Industries i.e., Reliance Industries and Tata Steel go up and down completely randomly.

Pair Corralation between Reliance Industries and Tata Steel

Assuming the 90 days trading horizon Reliance Industries Limited is expected to under-perform the Tata Steel. But the stock apears to be less risky and, when comparing its historical volatility, Reliance Industries Limited is 1.57 times less risky than Tata Steel. The stock trades about -0.17 of its potential returns per unit of risk. The Tata Steel Limited is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,795  in Tata Steel Limited on September 5, 2024 and sell it today you would lose (85.00) from holding Tata Steel Limited or give up 4.74% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Reliance Industries Limited  vs.  Tata Steel 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. Despite conflicting performance in the last few months, the Stock's essential indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Tata Steel Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tata Steel Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent essential indicators, Tata Steel is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Reliance Industries and Tata Steel

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

The idea behind Reliance Industries Limited and Tata Steel 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.