Correlation Between E M and DFCC Bank

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

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

Diversification Opportunities for E M and DFCC Bank

0.65

Correlation Coefficient

E M  DFCC Bank

Poor diversification

The 3 months correlation between EMLN0000 and DFCC is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding E M L and DFCC Bank PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DFCC Bank PLC and E M 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 E M L are associated (or correlated) with DFCC Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DFCC Bank PLC has no effect on the direction of E M i.e., E M and DFCC Bank go up and down completely randomly.

Pair Corralation between E M and DFCC Bank

Assuming the 90 days trading horizon E M L is expected to under-perform the DFCC Bank. But the stock apears to be less risky and, when comparing its historical volatility, E M L is 1.0 times less risky than DFCC Bank. The stock trades about -0.02 of its potential returns per unit of risk. The DFCC Bank PLC is currently generating about 0.55 of returns per unit of risk over similar time horizon. If you would invest  9,360  in DFCC Bank PLC on October 26, 2024 and sell it today you would earn a total of  3,940  from holding DFCC Bank PLC or generate 42.09% return on investment over 90 days.

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

E M L  vs.  DFCC Bank PLC

E M L

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in E M L are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, E M sustained solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with E M and DFCC Bank

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

The idea behind E M L and DFCC Bank PLC 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.