Correlation Between Transport and Coal India

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

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

Diversification Opportunities for Transport and Coal India

-0.53

Correlation Coefficient

Transport  Coal India

Excellent diversification

The 3 months correlation between Transport and Coal is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Transport of and Coal India Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Coal India Limited and Transport 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 Transport of are associated (or correlated) with Coal India. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Coal India Limited has no effect on the direction of Transport i.e., Transport and Coal India go up and down completely randomly.

Pair Corralation between Transport and Coal India

Assuming the 90 days trading horizon Transport of is expected to generate 2.08 times more return on investment than Coal India. However, Transport is 2.08 times more volatile than Coal India Limited. It trades about 0.05 of its potential returns per unit of risk. Coal India Limited is currently generating about 0.08 per unit of risk. If you would invest  60,138  in Transport of on October 5, 2024 and sell it today you would earn a total of  54,832  from holding Transport of or generate 91.18% return on investment over 90 days.

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

Transport of  vs.  Coal India Limited

Transport

Risk-Adjusted Performance

8 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Transport of are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Transport exhibited solid returns over the last few months and may actually be approaching a breakup point.

Coal India Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Coal India Limited 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 fundamental indicators remain rather sound which may send shares a bit higher in February 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Transport and Coal India

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

The idea behind Transport of and Coal India 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.