Correlation Between Tata Steel and CVS Health

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

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

Diversification Opportunities for Tata Steel and CVS Health

0.62

Correlation Coefficient

Tata Steel  CVS Health

Poor diversification

The 3 months correlation between Tata and CVS is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Tata Steel Limited and CVS Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health Corp and Tata Steel 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 Steel Limited are associated (or correlated) with CVS Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS Health Corp has no effect on the direction of Tata Steel i.e., Tata Steel and CVS Health go up and down completely randomly.

Pair Corralation between Tata Steel and CVS Health

Assuming the 90 days trading horizon Tata Steel is expected to generate 3.29 times less return on investment than CVS Health. But when comparing it to its historical volatility, Tata Steel Limited is 1.45 times less risky than CVS Health. It trades about 0.12 of its potential returns per unit of risk. CVS Health Corp is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  4,348  in CVS Health Corp on December 29, 2024 and sell it today you would earn a total of  2,393  from holding CVS Health Corp or generate 55.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.88%
Values	Daily Returns

Tata Steel Limited  vs.  CVS Health Corp

Tata Steel Limited

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tata Steel Limited are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting essential indicators, Tata Steel disclosed solid returns over the last few months and may actually be approaching a breakup point.

CVS Health Corp

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health Corp are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, CVS Health unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tata Steel and CVS Health

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

The idea behind Tata Steel Limited and CVS Health Corp 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.