Correlation Between Tree House and MRF

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

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

Diversification Opportunities for Tree House and MRF

0.7

Correlation Coefficient

Tree House  MRF

Poor diversification

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

Pair Corralation between Tree House and MRF

Assuming the 90 days trading horizon Tree House Education is expected to under-perform the MRF. In addition to that, Tree House is 2.18 times more volatile than MRF Limited. It trades about -0.1 of its total potential returns per unit of risk. MRF Limited is currently generating about 0.03 per unit of volatility. If you would invest  12,510,900  in MRF Limited on September 19, 2024 and sell it today you would earn a total of  530,200  from holding MRF Limited or generate 4.24% return on investment over 90 days.

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

Tree House Education  vs.  MRF Limited

Tree House Education

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tree House Education has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Tree House is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

MRF Limited

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Tree House and MRF

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

The idea behind Tree House Education and MRF 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.