Correlation Between National Refinery and Lotte Chemical

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

By analyzing existing cross correlation between National Refinery and Lotte Chemical Pakistan, you can compare the effects of market volatilities on National Refinery and Lotte Chemical 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 Refinery with a short position of Lotte Chemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of National Refinery and Lotte Chemical.

Diversification Opportunities for National Refinery and Lotte Chemical

0.87

Correlation Coefficient

National Refinery  Lotte Chemical

Very poor diversification

The 3 months correlation between National and Lotte is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding National Refinery and Lotte Chemical Pakistan in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lotte Chemical Pakistan and National Refinery 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 Refinery are associated (or correlated) with Lotte Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lotte Chemical Pakistan has no effect on the direction of National Refinery i.e., National Refinery and Lotte Chemical go up and down completely randomly.

Pair Corralation between National Refinery and Lotte Chemical

Assuming the 90 days trading horizon National Refinery is expected to generate 1.13 times more return on investment than Lotte Chemical. However, National Refinery is 1.13 times more volatile than Lotte Chemical Pakistan. It trades about 0.18 of its potential returns per unit of risk. Lotte Chemical Pakistan is currently generating about 0.05 per unit of risk. If you would invest  26,625  in National Refinery on October 9, 2024 and sell it today you would earn a total of  3,941  from holding National Refinery or generate 14.8% return on investment over 90 days.

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

National Refinery  vs.  Lotte Chemical Pakistan

National Refinery

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in National Refinery are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, National Refinery reported solid returns over the last few months and may actually be approaching a breakup point.

Lotte Chemical Pakistan

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lotte Chemical Pakistan are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very weak technical indicators, Lotte Chemical displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with National Refinery and Lotte Chemical

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

The idea behind National Refinery and Lotte Chemical Pakistan 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.