Correlation Between Sri Lanka and Lanka IOC

Can any of the company-specific risk be diversified away by investing in both Sri Lanka and Lanka IOC 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 Lanka IOC 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 Lanka IOC PLC, you can compare the effects of market volatilities on Sri Lanka and Lanka IOC 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 Lanka IOC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sri Lanka and Lanka IOC.

Diversification Opportunities for Sri Lanka and Lanka IOC

0.26

Correlation Coefficient

Sri Lanka  Lanka IOC

Modest diversification

The 3 months correlation between Sri and Lanka is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Sri Lanka Telecom and Lanka IOC PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lanka IOC 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 Lanka IOC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lanka IOC PLC has no effect on the direction of Sri Lanka i.e., Sri Lanka and Lanka IOC go up and down completely randomly.

Pair Corralation between Sri Lanka and Lanka IOC

Assuming the 90 days trading horizon Sri Lanka Telecom is expected to under-perform the Lanka IOC. In addition to that, Sri Lanka is 1.12 times more volatile than Lanka IOC PLC. It trades about -0.3 of its total potential returns per unit of risk. Lanka IOC PLC is currently generating about -0.15 per unit of volatility. If you would invest  12,650  in Lanka IOC PLC on October 26, 2024 and sell it today you would lose (450.00) from holding Lanka IOC PLC or give up 3.56% of portfolio value over 90 days.

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

Sri Lanka Telecom  vs.  Lanka IOC PLC

Sri Lanka Telecom

Risk-Adjusted Performance

0 of 100

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 somewhat strong basic indicators, Sri Lanka is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Lanka IOC PLC

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lanka IOC PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lanka IOC may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Sri Lanka and Lanka IOC

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

The idea behind Sri Lanka Telecom and Lanka IOC 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.