Correlation Between Pan Asia and Lighthouse Hotel

Can any of the company-specific risk be diversified away by investing in both Pan Asia and Lighthouse Hotel 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 Pan Asia and Lighthouse Hotel into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Pan Asia Banking and Lighthouse Hotel PLC, you can compare the effects of market volatilities on Pan Asia and Lighthouse Hotel 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 Pan Asia with a short position of Lighthouse Hotel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Pan Asia and Lighthouse Hotel.

Diversification Opportunities for Pan Asia and Lighthouse Hotel

0.86

Correlation Coefficient

Pan Asia  Lighthouse Hotel

Very poor diversification

The 3 months correlation between Pan and Lighthouse is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Pan Asia Banking and Lighthouse Hotel PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lighthouse Hotel PLC and Pan Asia 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 Pan Asia Banking are associated (or correlated) with Lighthouse Hotel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lighthouse Hotel PLC has no effect on the direction of Pan Asia i.e., Pan Asia and Lighthouse Hotel go up and down completely randomly.

Pair Corralation between Pan Asia and Lighthouse Hotel

Assuming the 90 days trading horizon Pan Asia is expected to generate 1.09 times less return on investment than Lighthouse Hotel. But when comparing it to its historical volatility, Pan Asia Banking is 1.28 times less risky than Lighthouse Hotel. It trades about 0.34 of its potential returns per unit of risk. Lighthouse Hotel PLC is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  4,100  in Lighthouse Hotel PLC on September 15, 2024 and sell it today you would earn a total of  2,100  from holding Lighthouse Hotel PLC or generate 51.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.0%
Values	Daily Returns

Pan Asia Banking  vs.  Lighthouse Hotel PLC

Pan Asia Banking

Risk-Adjusted Performance

26 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Pan Asia Banking are ranked lower than 26 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Pan Asia sustained solid returns over the last few months and may actually be approaching a breakup point.

Lighthouse Hotel PLC

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lighthouse Hotel PLC are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lighthouse Hotel sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Pan Asia and Lighthouse Hotel

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

The idea behind Pan Asia Banking and Lighthouse Hotel 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.