Correlation Between Lion Brewery and Tal Lanka

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

By analyzing existing cross correlation between Lion Brewery Ceylon and Tal Lanka Hotels, you can compare the effects of market volatilities on Lion Brewery and Tal Lanka 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 Lion Brewery with a short position of Tal Lanka. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lion Brewery and Tal Lanka.

Diversification Opportunities for Lion Brewery and Tal Lanka

0.84

Correlation Coefficient

Lion Brewery  Tal Lanka

Very poor diversification

The 3 months correlation between Lion and Tal is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Lion Brewery Ceylon and Tal Lanka Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tal Lanka Hotels and Lion Brewery 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 Lion Brewery Ceylon are associated (or correlated) with Tal Lanka. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tal Lanka Hotels has no effect on the direction of Lion Brewery i.e., Lion Brewery and Tal Lanka go up and down completely randomly.

Pair Corralation between Lion Brewery and Tal Lanka

Assuming the 90 days trading horizon Lion Brewery is expected to generate 1.05 times less return on investment than Tal Lanka. But when comparing it to its historical volatility, Lion Brewery Ceylon is 1.12 times less risky than Tal Lanka. It trades about 0.15 of its potential returns per unit of risk. Tal Lanka Hotels is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,870  in Tal Lanka Hotels on October 24, 2024 and sell it today you would earn a total of  420.00  from holding Tal Lanka Hotels or generate 22.46% return on investment over 90 days.

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

Lion Brewery Ceylon  vs.  Tal Lanka Hotels

Lion Brewery Ceylon

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lion Brewery Ceylon are ranked lower than 12 (%) 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.

Tal Lanka Hotels

Risk-Adjusted Performance

11 of 100

Good

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

Pair Trading with Lion Brewery and Tal Lanka

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

The idea behind Lion Brewery Ceylon and Tal Lanka Hotels 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.