Correlation Between National Development and Tal Lanka

Can any of the company-specific risk be diversified away by investing in both National Development 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 National Development and Tal Lanka 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 Tal Lanka Hotels, you can compare the effects of market volatilities on National Development 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 National Development with a short position of Tal Lanka. Check out your portfolio center. Please also check ongoing floating volatility patterns of National Development and Tal Lanka.

Diversification Opportunities for National Development and Tal Lanka

0.72

Correlation Coefficient

National Development  Tal Lanka

Poor diversification

The 3 months correlation between National and Tal is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding National Development Bank 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 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 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 National Development i.e., National Development and Tal Lanka go up and down completely randomly.

Pair Corralation between National Development and Tal Lanka

Assuming the 90 days trading horizon National Development Bank is expected to generate 1.06 times more return on investment than Tal Lanka. However, National Development is 1.06 times more volatile than Tal Lanka Hotels. It trades about 0.1 of its potential returns per unit of risk. Tal Lanka Hotels is currently generating about -0.02 per unit of risk. If you would invest  9,470  in National Development Bank on December 25, 2024 and sell it today you would earn a total of  1,405  from holding National Development Bank or generate 14.84% 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.  Tal Lanka Hotels

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 7 (%) 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.

Tal Lanka Hotels

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tal Lanka Hotels has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Tal Lanka 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 Tal Lanka

The main advantage of trading using opposite National Development and Tal Lanka positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if National Development 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 National Development Bank 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.