Correlation Between Varun Beverages and CEAT

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

By analyzing existing cross correlation between Varun Beverages Limited and CEAT Limited, you can compare the effects of market volatilities on Varun Beverages and CEAT 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 Varun Beverages with a short position of CEAT. Check out your portfolio center. Please also check ongoing floating volatility patterns of Varun Beverages and CEAT.

Diversification Opportunities for Varun Beverages and CEAT

0.47

Correlation Coefficient

Varun Beverages  CEAT

Very weak diversification

The 3 months correlation between Varun and CEAT is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Varun Beverages Limited and CEAT Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CEAT Limited and Varun Beverages 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 Varun Beverages Limited are associated (or correlated) with CEAT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CEAT Limited has no effect on the direction of Varun Beverages i.e., Varun Beverages and CEAT go up and down completely randomly.

Pair Corralation between Varun Beverages and CEAT

Assuming the 90 days trading horizon Varun Beverages Limited is expected to under-perform the CEAT. In addition to that, Varun Beverages is 1.11 times more volatile than CEAT Limited. It trades about -0.4 of its total potential returns per unit of risk. CEAT Limited is currently generating about -0.08 per unit of volatility. If you would invest  304,185  in CEAT Limited on October 24, 2024 and sell it today you would lose (8,180) from holding CEAT Limited or give up 2.69% of portfolio value over 90 days.

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

Varun Beverages Limited  vs.  CEAT Limited

Varun Beverages

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Varun Beverages Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

CEAT Limited

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CEAT Limited are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady essential indicators, CEAT may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Varun Beverages and CEAT

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

The idea behind Varun Beverages Limited and CEAT 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.

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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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.