Correlation Between United Drilling and Vedanta

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

Diversification Opportunities for United Drilling and Vedanta

0.44

Correlation Coefficient

United Drilling  Vedanta

Very weak diversification

The 3 months correlation between United and Vedanta is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding United Drilling Tools and Vedanta Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vedanta Limited 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 Vedanta. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vedanta Limited has no effect on the direction of United Drilling i.e., United Drilling and Vedanta go up and down completely randomly.

Pair Corralation between United Drilling and Vedanta

Assuming the 90 days trading horizon United Drilling Tools is expected to generate 1.12 times more return on investment than Vedanta. However, United Drilling is 1.12 times more volatile than Vedanta Limited. It trades about -0.14 of its potential returns per unit of risk. Vedanta Limited is currently generating about -0.21 per unit of risk. If you would invest  27,980  in United Drilling Tools on October 8, 2024 and sell it today you would lose (1,305) from holding United Drilling Tools or give up 4.66% of portfolio value over 90 days.

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

United Drilling Tools  vs.  Vedanta Limited

United Drilling Tools

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in United Drilling Tools are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very weak forward indicators, United Drilling displayed solid returns over the last few months and may actually be approaching a breakup point.

Vedanta Limited

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with United Drilling and Vedanta

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

The idea behind United Drilling Tools and Vedanta Limited 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.