Correlation Between United Drilling and Indian Railway

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

By analyzing existing cross correlation between United Drilling Tools and Indian Railway Finance, you can compare the effects of market volatilities on United Drilling and Indian Railway 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 United Drilling with a short position of Indian Railway. Check out your portfolio center. Please also check ongoing floating volatility patterns of United Drilling and Indian Railway.

Diversification Opportunities for United Drilling and Indian Railway

0.6

Correlation Coefficient

United Drilling  Indian Railway

Poor diversification

The 3 months correlation between United and Indian is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding United Drilling Tools and Indian Railway Finance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Indian Railway Finance and United Drilling 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 United Drilling Tools are associated (or correlated) with Indian Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Indian Railway Finance has no effect on the direction of United Drilling i.e., United Drilling and Indian Railway go up and down completely randomly.

Pair Corralation between United Drilling and Indian Railway

Assuming the 90 days trading horizon United Drilling Tools is expected to generate 1.08 times more return on investment than Indian Railway. However, United Drilling is 1.08 times more volatile than Indian Railway Finance. It trades about -0.1 of its potential returns per unit of risk. Indian Railway Finance is currently generating about -0.17 per unit of risk. If you would invest  27,980  in United Drilling Tools on October 9, 2024 and sell it today you would lose (1,565) from holding United Drilling Tools or give up 5.59% of portfolio value over 90 days.

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

United Drilling Tools  vs.  Indian Railway Finance

United Drilling Tools

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in United Drilling Tools are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting forward indicators, United Drilling displayed solid returns over the last few months and may actually be approaching a breakup point.

Indian Railway Finance

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with United Drilling and Indian Railway

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

The idea behind United Drilling Tools and Indian Railway Finance 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..