Correlation Between Tata Consultancy and ITI

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

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

Diversification Opportunities for Tata Consultancy and ITI

0.68

Correlation Coefficient

Tata Consultancy  ITI

Poor diversification

The 3 months correlation between Tata and ITI is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Tata Consultancy Services and ITI Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ITI Limited and Tata Consultancy 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 Consultancy Services are associated (or correlated) with ITI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ITI Limited has no effect on the direction of Tata Consultancy i.e., Tata Consultancy and ITI go up and down completely randomly.

Pair Corralation between Tata Consultancy and ITI

Assuming the 90 days trading horizon Tata Consultancy Services is expected to under-perform the ITI. But the stock apears to be less risky and, when comparing its historical volatility, Tata Consultancy Services is 3.69 times less risky than ITI. The stock trades about -0.02 of its potential returns per unit of risk. The ITI Limited is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  27,515  in ITI Limited on September 26, 2024 and sell it today you would earn a total of  6,860  from holding ITI Limited or generate 24.93% return on investment over 90 days.

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

Tata Consultancy Services  vs.  ITI Limited

Tata Consultancy Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tata Consultancy Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Tata Consultancy is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

ITI Limited

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ITI Limited are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, ITI exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tata Consultancy and ITI

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

The idea behind Tata Consultancy Services and ITI 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.

Check out your portfolio center.

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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.