Correlation Between E M and Mahaweli Reach

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

Diversification Opportunities for E M and Mahaweli Reach

0.79

Correlation Coefficient

E M  Mahaweli Reach

Poor diversification

The 3 months correlation between EMLN0000 and Mahaweli is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding E M L and Mahaweli Reach Hotel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mahaweli Reach Hotel 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 Mahaweli Reach. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mahaweli Reach Hotel has no effect on the direction of E M i.e., E M and Mahaweli Reach go up and down completely randomly.

Pair Corralation between E M and Mahaweli Reach

Assuming the 90 days trading horizon E M is expected to generate 3.45 times less return on investment than Mahaweli Reach. In addition to that, E M is 1.02 times more volatile than Mahaweli Reach Hotel. It trades about 0.07 of its total potential returns per unit of risk. Mahaweli Reach Hotel is currently generating about 0.24 per unit of volatility. If you would invest  1,430  in Mahaweli Reach Hotel on October 24, 2024 and sell it today you would earn a total of  840.00  from holding Mahaweli Reach Hotel or generate 58.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.28%
Values	Daily Returns

E M L  vs.  Mahaweli Reach Hotel

E M L

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in E M L are ranked lower than 5 (%) 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.

Mahaweli Reach Hotel

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mahaweli Reach Hotel are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Mahaweli Reach sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with E M and Mahaweli Reach

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

The idea behind E M L and Mahaweli Reach Hotel 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.