Correlation Between Lanka Milk and E M

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

By analyzing existing cross correlation between Lanka Milk Foods and E M L, you can compare the effects of market volatilities on Lanka Milk and E M 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 Milk with a short position of E M. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lanka Milk and E M.

Diversification Opportunities for Lanka Milk and E M

0.65

Correlation Coefficient

Lanka Milk  E M

Poor diversification

The 3 months correlation between Lanka and EMLN0000 is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Lanka Milk Foods and E M L in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on E M L and Lanka Milk 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 Milk Foods are associated (or correlated) with E M. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of E M L has no effect on the direction of Lanka Milk i.e., Lanka Milk and E M go up and down completely randomly.

Pair Corralation between Lanka Milk and E M

Assuming the 90 days trading horizon Lanka Milk Foods is expected to generate 0.78 times more return on investment than E M. However, Lanka Milk Foods is 1.28 times less risky than E M. It trades about -0.01 of its potential returns per unit of risk. E M L is currently generating about -0.03 per unit of risk. If you would invest  4,420  in Lanka Milk Foods on December 26, 2024 and sell it today you would lose (130.00) from holding Lanka Milk Foods or give up 2.94% of portfolio value over 90 days.

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

Lanka Milk Foods  vs.  E M L

Lanka Milk Foods

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lanka Milk Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Lanka Milk is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

E M L

Risk-Adjusted Performance

Very Weak

Over the last 90 days E M L has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, E M is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Lanka Milk and E M

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

The idea behind Lanka Milk Foods and E M L 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..