Correlation Between City Lodge and African Rainbow

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

By analyzing existing cross correlation between City Lodge Hotels and African Rainbow Capital, you can compare the effects of market volatilities on City Lodge and African Rainbow 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 City Lodge with a short position of African Rainbow. Check out your portfolio center. Please also check ongoing floating volatility patterns of City Lodge and African Rainbow.

Diversification Opportunities for City Lodge and African Rainbow

0.53

Correlation Coefficient

City Lodge  African Rainbow

Very weak diversification

The 3 months correlation between City and African is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding City Lodge Hotels and African Rainbow Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on African Rainbow Capital and City Lodge 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 City Lodge Hotels are associated (or correlated) with African Rainbow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of African Rainbow Capital has no effect on the direction of City Lodge i.e., City Lodge and African Rainbow go up and down completely randomly.

Pair Corralation between City Lodge and African Rainbow

Assuming the 90 days trading horizon City Lodge Hotels is expected to under-perform the African Rainbow. But the stock apears to be less risky and, when comparing its historical volatility, City Lodge Hotels is 1.24 times less risky than African Rainbow. The stock trades about -0.23 of its potential returns per unit of risk. The African Rainbow Capital is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  94,800  in African Rainbow Capital on December 21, 2024 and sell it today you would lose (1,300) from holding African Rainbow Capital or give up 1.37% of portfolio value over 90 days.

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

City Lodge Hotels  vs.  African Rainbow Capital

City Lodge Hotels

Risk-Adjusted Performance

Very Weak

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

African Rainbow Capital

Risk-Adjusted Performance

Very Weak

Over the last 90 days African Rainbow Capital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, African Rainbow is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with City Lodge and African Rainbow

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

The idea behind City Lodge Hotels and African Rainbow Capital 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.