Correlation Between National Development and Central Industries

Can any of the company-specific risk be diversified away by investing in both National Development and Central Industries 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 National Development and Central Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between National Development Bank and Central Industries PLC, you can compare the effects of market volatilities on National Development and Central Industries 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 National Development with a short position of Central Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of National Development and Central Industries.

Diversification Opportunities for National Development and Central Industries

0.75

Correlation Coefficient

National Development  Central Industries

Poor diversification

The 3 months correlation between National and Central is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding National Development Bank and Central Industries PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Central Industries PLC and National Development 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 National Development Bank are associated (or correlated) with Central Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Central Industries PLC has no effect on the direction of National Development i.e., National Development and Central Industries go up and down completely randomly.

Pair Corralation between National Development and Central Industries

Assuming the 90 days trading horizon National Development Bank is expected to generate 1.26 times more return on investment than Central Industries. However, National Development is 1.26 times more volatile than Central Industries PLC. It trades about 0.08 of its potential returns per unit of risk. Central Industries PLC is currently generating about -0.02 per unit of risk. If you would invest  9,600  in National Development Bank on December 27, 2024 and sell it today you would earn a total of  1,100  from holding National Development Bank or generate 11.46% return on investment over 90 days.

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

National Development Bank  vs.  Central Industries PLC

National Development Bank

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in National Development Bank are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, National Development sustained solid returns over the last few months and may actually be approaching a breakup point.

Central Industries PLC

Risk-Adjusted Performance

Very Weak

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

Pair Trading with National Development and Central Industries

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

The idea behind National Development Bank and Central Industries 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.