Correlation Between Tata Steel and European Metals

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

Diversification Opportunities for Tata Steel and European Metals

0.28

Correlation Coefficient

Tata Steel  European Metals

Modest diversification

The 3 months correlation between Tata and European is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Tata Steel Limited and European Metals Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on European Metals Holdings 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 European Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of European Metals Holdings has no effect on the direction of Tata Steel i.e., Tata Steel and European Metals go up and down completely randomly.

Pair Corralation between Tata Steel and European Metals

Assuming the 90 days trading horizon Tata Steel Limited is expected to generate 0.59 times more return on investment than European Metals. However, Tata Steel Limited is 1.7 times less risky than European Metals. It trades about 0.28 of its potential returns per unit of risk. European Metals Holdings is currently generating about -0.26 per unit of risk. If you would invest  1,605  in Tata Steel Limited on September 15, 2024 and sell it today you would earn a total of  135.00  from holding Tata Steel Limited or generate 8.41% return on investment over 90 days.

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

Tata Steel Limited  vs.  European Metals Holdings

Tata Steel Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tata Steel Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent essential indicators, Tata Steel is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

European Metals Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days European Metals Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Tata Steel and European Metals

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

The idea behind Tata Steel Limited and European Metals Holdings 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.