Correlation Between E M and Lion Brewery

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

Diversification Opportunities for E M and Lion Brewery

0.72

Correlation Coefficient

E M  Lion Brewery

Poor diversification

The 3 months correlation between EMLN0000 and Lion is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding E M L and Lion Brewery Ceylon in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lion Brewery Ceylon 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 Lion Brewery. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lion Brewery Ceylon has no effect on the direction of E M i.e., E M and Lion Brewery go up and down completely randomly.

Pair Corralation between E M and Lion Brewery

Assuming the 90 days trading horizon E M L is expected to generate 1.8 times more return on investment than Lion Brewery. However, E M is 1.8 times more volatile than Lion Brewery Ceylon. It trades about 0.12 of its potential returns per unit of risk. Lion Brewery Ceylon is currently generating about 0.15 per unit of risk. If you would invest  330.00  in E M L on October 6, 2024 and sell it today you would earn a total of  90.00  from holding E M L or generate 27.27% 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.  Lion Brewery Ceylon

E M L

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in E M L are ranked lower than 9 (%) 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.

Lion Brewery Ceylon

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lion Brewery Ceylon are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lion Brewery sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with E M and Lion Brewery

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

The idea behind E M L and Lion Brewery Ceylon 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.