Correlation Between Tamilnad Mercantile and HDFC Bank

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

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

Diversification Opportunities for Tamilnad Mercantile and HDFC Bank

0.82

Correlation Coefficient

Tamilnad Mercantile  HDFC Bank

Very poor diversification

The 3 months correlation between Tamilnad and HDFC is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Tamilnad Mercantile Bank and HDFC Bank Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HDFC Bank Limited and Tamilnad Mercantile 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 Tamilnad Mercantile Bank are associated (or correlated) with HDFC Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HDFC Bank Limited has no effect on the direction of Tamilnad Mercantile i.e., Tamilnad Mercantile and HDFC Bank go up and down completely randomly.

Pair Corralation between Tamilnad Mercantile and HDFC Bank

Assuming the 90 days trading horizon Tamilnad Mercantile Bank is expected to under-perform the HDFC Bank. But the stock apears to be less risky and, when comparing its historical volatility, Tamilnad Mercantile Bank is 1.26 times less risky than HDFC Bank. The stock trades about -0.67 of its potential returns per unit of risk. The HDFC Bank Limited is currently generating about -0.44 of returns per unit of risk over similar time horizon. If you would invest  186,810  in HDFC Bank Limited on October 11, 2024 and sell it today you would lose (17,380) from holding HDFC Bank Limited or give up 9.3% of portfolio value over 90 days.

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

Tamilnad Mercantile Bank  vs.  HDFC Bank Limited

Tamilnad Mercantile Bank

Risk-Adjusted Performance

0 of 100

Very Weak

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

HDFC Bank Limited

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, HDFC Bank is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Tamilnad Mercantile and HDFC Bank

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

The idea behind Tamilnad Mercantile Bank and HDFC Bank 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.