Correlation Between Tata Steel and SBM Offshore

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

Diversification Opportunities for Tata Steel and SBM Offshore

0.27

Correlation Coefficient

Tata Steel  SBM Offshore

Modest diversification

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

Pair Corralation between Tata Steel and SBM Offshore

Assuming the 90 days trading horizon Tata Steel is expected to generate 1.59 times less return on investment than SBM Offshore. But when comparing it to its historical volatility, Tata Steel Limited is 1.13 times less risky than SBM Offshore. It trades about 0.1 of its potential returns per unit of risk. SBM Offshore NV is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,676  in SBM Offshore NV on December 21, 2024 and sell it today you would earn a total of  324.00  from holding SBM Offshore NV or generate 19.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Tata Steel Limited  vs.  SBM Offshore NV

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 7 (%) 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.

SBM Offshore NV

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SBM Offshore NV are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, SBM Offshore disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tata Steel and SBM Offshore

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

The idea behind Tata Steel Limited and SBM Offshore NV 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.