Correlation Between Tata Motors and Action Construction

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

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

Diversification Opportunities for Tata Motors and Action Construction

0.7

Correlation Coefficient

Tata Motors  Action Construction

Poor diversification

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

Pair Corralation between Tata Motors and Action Construction

Assuming the 90 days trading horizon Tata Motors Limited is expected to generate 0.69 times more return on investment than Action Construction. However, Tata Motors Limited is 1.44 times less risky than Action Construction. It trades about -0.17 of its potential returns per unit of risk. Action Construction Equipment is currently generating about -0.13 per unit of risk. If you would invest  78,810  in Tata Motors Limited on December 4, 2024 and sell it today you would lose (16,695) from holding Tata Motors Limited or give up 21.18% of portfolio value over 90 days.

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

Tata Motors Limited  vs.  Action Construction Equipment

Tata Motors Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tata Motors Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Action Construction

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Tata Motors and Action Construction

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

The idea behind Tata Motors Limited and Action Construction Equipment 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.