Correlation Between Union Bank and Lanka Ceramic

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

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

Diversification Opportunities for Union Bank and Lanka Ceramic

0.77

Correlation Coefficient

Union Bank  Lanka Ceramic

Poor diversification

The 3 months correlation between Union and Lanka is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Union Bank and Lanka Ceramic PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lanka Ceramic PLC and Union Bank 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 Union Bank are associated (or correlated) with Lanka Ceramic. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lanka Ceramic PLC has no effect on the direction of Union Bank i.e., Union Bank and Lanka Ceramic go up and down completely randomly.

Pair Corralation between Union Bank and Lanka Ceramic

Assuming the 90 days trading horizon Union Bank is expected to generate 2.68 times less return on investment than Lanka Ceramic. But when comparing it to its historical volatility, Union Bank is 1.44 times less risky than Lanka Ceramic. It trades about 0.04 of its potential returns per unit of risk. Lanka Ceramic PLC is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  10,400  in Lanka Ceramic PLC on October 12, 2024 and sell it today you would earn a total of  3,150  from holding Lanka Ceramic PLC or generate 30.29% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	83.8%
Values	Daily Returns

Union Bank  vs.  Lanka Ceramic PLC

Union Bank

Risk-Adjusted Performance

11 of 100

Good

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

Lanka Ceramic PLC

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with Union Bank and Lanka Ceramic

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

The idea behind Union Bank and Lanka Ceramic 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.