Correlation Between Sri Lanka and Central Industries

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

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

Diversification Opportunities for Sri Lanka and Central Industries

0.4

Correlation Coefficient

Sri Lanka  Central Industries

Very weak diversification

The 3 months correlation between Sri and Central is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Sri Lanka Telecom 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 Sri Lanka 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 Sri Lanka Telecom 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 Sri Lanka i.e., Sri Lanka and Central Industries go up and down completely randomly.

Pair Corralation between Sri Lanka and Central Industries

Assuming the 90 days trading horizon Sri Lanka Telecom is expected to under-perform the Central Industries. But the stock apears to be less risky and, when comparing its historical volatility, Sri Lanka Telecom is 1.39 times less risky than Central Industries. The stock trades about -0.19 of its potential returns per unit of risk. The Central Industries PLC is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  14,975  in Central Industries PLC on December 26, 2024 and sell it today you would lose (525.00) from holding Central Industries PLC or give up 3.51% of portfolio value over 90 days.

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

Sri Lanka Telecom  vs.  Central Industries PLC

Sri Lanka Telecom

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sri Lanka Telecom has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

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 Sri Lanka and Central Industries

The main advantage of trading using opposite Sri Lanka and Central Industries positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sri Lanka 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 Sri Lanka Telecom 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.

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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.