Correlation Between Tata Consultancy and Ortel Communications

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

Diversification Opportunities for Tata Consultancy and Ortel Communications

-0.27

Correlation Coefficient

Tata Consultancy  Ortel Communications

Very good diversification

The 3 months correlation between Tata and Ortel is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding Tata Consultancy Services and Ortel Communications Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ortel Communications 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 Ortel Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ortel Communications has no effect on the direction of Tata Consultancy i.e., Tata Consultancy and Ortel Communications go up and down completely randomly.

Pair Corralation between Tata Consultancy and Ortel Communications

Assuming the 90 days trading horizon Tata Consultancy Services is expected to generate 0.5 times more return on investment than Ortel Communications. However, Tata Consultancy Services is 1.99 times less risky than Ortel Communications. It trades about -0.04 of its potential returns per unit of risk. Ortel Communications Limited is currently generating about -0.03 per unit of risk. If you would invest  446,506  in Tata Consultancy Services on September 5, 2024 and sell it today you would lose (16,231) from holding Tata Consultancy Services or give up 3.64% of portfolio value over 90 days.

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

Tata Consultancy Services  vs.  Ortel Communications 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 latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Ortel Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ortel Communications Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Ortel Communications is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Tata Consultancy and Ortel Communications

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

The idea behind Tata Consultancy Services and Ortel Communications 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.