Correlation Between Sri Lanka and Lanka Milk

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

Diversification Opportunities for Sri Lanka and Lanka Milk

0.26

Correlation Coefficient

Sri Lanka  Lanka Milk

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 Milk Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lanka Milk Foods 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 Milk. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lanka Milk Foods has no effect on the direction of Sri Lanka i.e., Sri Lanka and Lanka Milk go up and down completely randomly.

Pair Corralation between Sri Lanka and Lanka Milk

Assuming the 90 days trading horizon Sri Lanka Telecom is expected to under-perform the Lanka Milk. But the stock apears to be less risky and, when comparing its historical volatility, Sri Lanka Telecom is 1.58 times less risky than Lanka Milk. The stock trades about -0.18 of its potential returns per unit of risk. The Lanka Milk Foods is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  4,420  in Lanka Milk Foods on December 25, 2024 and sell it today you would lose (30.00) from holding Lanka Milk Foods or give up 0.68% 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 Milk Foods

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.

Lanka Milk Foods

Risk-Adjusted Performance

Very Weak

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

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

The idea behind Sri Lanka Telecom and Lanka Milk Foods 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.