Correlation Between Tata Steel and Cboe UK

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

Diversification Opportunities for Tata Steel and Cboe UK

-0.68

Correlation Coefficient

Tata Steel  Cboe UK

Excellent diversification

The 3 months correlation between Tata and Cboe is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Tata Steel Limited and Cboe UK Consumer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cboe UK Consumer 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 Cboe UK. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cboe UK Consumer has no effect on the direction of Tata Steel i.e., Tata Steel and Cboe UK go up and down completely randomly.

Pair Corralation between Tata Steel and Cboe UK

Assuming the 90 days trading horizon Tata Steel is expected to generate 1.66 times less return on investment than Cboe UK. In addition to that, Tata Steel is 2.55 times more volatile than Cboe UK Consumer. It trades about 0.03 of its total potential returns per unit of risk. Cboe UK Consumer is currently generating about 0.13 per unit of volatility. If you would invest  2,499,363  in Cboe UK Consumer on September 13, 2024 and sell it today you would earn a total of  809,289  from holding Cboe UK Consumer or generate 32.38% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	99.21%
Values	Daily Returns

Tata Steel Limited  vs.  Cboe UK Consumer

Pair Trading with Tata Steel and Cboe UK

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

The idea behind Tata Steel Limited and Cboe UK Consumer 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.