Correlation Between E M and Sampath Bank

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

Diversification Opportunities for E M and Sampath Bank

0.73

Correlation Coefficient

E M  Sampath Bank

Poor diversification

The 3 months correlation between EMLN0000 and Sampath is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding E M L and Sampath Bank PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sampath 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 Sampath Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sampath Bank PLC has no effect on the direction of E M i.e., E M and Sampath Bank go up and down completely randomly.

Pair Corralation between E M and Sampath Bank

Assuming the 90 days trading horizon E M is expected to generate 1.5 times less return on investment than Sampath Bank. In addition to that, E M is 2.73 times more volatile than Sampath Bank PLC. It trades about 0.1 of its total potential returns per unit of risk. Sampath Bank PLC is currently generating about 0.41 per unit of volatility. If you would invest  10,075  in Sampath Bank PLC on October 10, 2024 and sell it today you would earn a total of  1,650  from holding Sampath Bank PLC or generate 16.38% 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.  Sampath Bank PLC

E M L

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in E M L are ranked lower than 6 (%) 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.

Sampath Bank PLC

Risk-Adjusted Performance

31 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Sampath Bank PLC are ranked lower than 31 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sampath Bank sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with E M and Sampath Bank

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

The idea behind E M L and Sampath 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.

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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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.