Correlation Between Lanka Credit and Colombo Investment

Can any of the company-specific risk be diversified away by investing in both Lanka Credit and Colombo Investment 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 Lanka Credit and Colombo Investment into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Lanka Credit and and Colombo Investment Trust, you can compare the effects of market volatilities on Lanka Credit and Colombo Investment 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 Lanka Credit with a short position of Colombo Investment. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lanka Credit and Colombo Investment.

Diversification Opportunities for Lanka Credit and Colombo Investment

-0.01

Correlation Coefficient

Lanka Credit  Colombo Investment

Good diversification

The 3 months correlation between Lanka and Colombo is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Lanka Credit and and Colombo Investment Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Colombo Investment Trust and Lanka Credit 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 Lanka Credit and are associated (or correlated) with Colombo Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Colombo Investment Trust has no effect on the direction of Lanka Credit i.e., Lanka Credit and Colombo Investment go up and down completely randomly.

Pair Corralation between Lanka Credit and Colombo Investment

Assuming the 90 days trading horizon Lanka Credit is expected to generate 1.65 times less return on investment than Colombo Investment. But when comparing it to its historical volatility, Lanka Credit and is 1.16 times less risky than Colombo Investment. It trades about 0.1 of its potential returns per unit of risk. Colombo Investment Trust is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  9,050  in Colombo Investment Trust on September 13, 2024 and sell it today you would earn a total of  1,675  from holding Colombo Investment Trust or generate 18.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	55.93%
Values	Daily Returns

Lanka Credit and  vs.  Colombo Investment Trust

Lanka Credit

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lanka Credit and are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lanka Credit sustained solid returns over the last few months and may actually be approaching a breakup point.

Colombo Investment Trust

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Colombo Investment Trust are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Colombo Investment sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lanka Credit and Colombo Investment

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

The idea behind Lanka Credit and and Colombo Investment Trust 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.