Correlation Between DFCC Bank and Ceylon Tobacco

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

By analyzing existing cross correlation between DFCC Bank PLC and Ceylon Tobacco, you can compare the effects of market volatilities on DFCC Bank and Ceylon Tobacco 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 DFCC Bank with a short position of Ceylon Tobacco. Check out your portfolio center. Please also check ongoing floating volatility patterns of DFCC Bank and Ceylon Tobacco.

Diversification Opportunities for DFCC Bank and Ceylon Tobacco

0.95

Correlation Coefficient

DFCC Bank  Ceylon Tobacco

Almost no diversification

The 3 months correlation between DFCC and Ceylon is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding DFCC Bank PLC and Ceylon Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ceylon Tobacco and DFCC Bank 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 DFCC Bank PLC are associated (or correlated) with Ceylon Tobacco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ceylon Tobacco has no effect on the direction of DFCC Bank i.e., DFCC Bank and Ceylon Tobacco go up and down completely randomly.

Pair Corralation between DFCC Bank and Ceylon Tobacco

Assuming the 90 days trading horizon DFCC Bank PLC is expected to generate 1.96 times more return on investment than Ceylon Tobacco. However, DFCC Bank is 1.96 times more volatile than Ceylon Tobacco. It trades about 0.35 of its potential returns per unit of risk. Ceylon Tobacco is currently generating about 0.27 per unit of risk. If you would invest  8,290  in DFCC Bank PLC on October 26, 2024 and sell it today you would earn a total of  5,010  from holding DFCC Bank PLC or generate 60.43% return on investment over 90 days.

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

DFCC Bank PLC  vs.  Ceylon Tobacco

DFCC Bank PLC

Risk-Adjusted Performance

27 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in DFCC Bank PLC are ranked lower than 27 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, DFCC Bank sustained solid returns over the last few months and may actually be approaching a breakup point.

Ceylon Tobacco

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Ceylon Tobacco are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ceylon Tobacco sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with DFCC Bank and Ceylon Tobacco

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

The idea behind DFCC Bank PLC and Ceylon Tobacco 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.