Correlation Between Convenience Foods and Union Chemicals

Can any of the company-specific risk be diversified away by investing in both Convenience Foods and Union Chemicals 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 Convenience Foods and Union Chemicals into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Convenience Foods and Union Chemicals

0.56

Correlation Coefficient

Convenience Foods  Union Chemicals

Very weak diversification

The 3 months correlation between Convenience and Union is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Convenience Foods PLC and Union Chemicals Lanka in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Union Chemicals Lanka and Convenience Foods 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 Convenience Foods PLC are associated (or correlated) with Union Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Union Chemicals Lanka has no effect on the direction of Convenience Foods i.e., Convenience Foods and Union Chemicals go up and down completely randomly.

Pair Corralation between Convenience Foods and Union Chemicals

Assuming the 90 days trading horizon Convenience Foods PLC is expected to generate 4.4 times more return on investment than Union Chemicals. However, Convenience Foods is 4.4 times more volatile than Union Chemicals Lanka. It trades about 0.19 of its potential returns per unit of risk. Union Chemicals Lanka is currently generating about -0.05 per unit of risk. If you would invest  83,825  in Convenience Foods PLC on September 16, 2024 and sell it today you would earn a total of  6,500  from holding Convenience Foods PLC or generate 7.75% return on investment over 90 days.

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

Convenience Foods PLC  vs.  Union Chemicals Lanka

Convenience Foods PLC

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Convenience Foods PLC are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Convenience Foods sustained solid returns over the last few months and may actually be approaching a breakup point.

Union Chemicals Lanka

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Union Chemicals Lanka are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Union Chemicals sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Convenience Foods and Union Chemicals

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

The idea behind Convenience Foods PLC and Union Chemicals Lanka 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..