Correlation Between Union Bank and Ceylon Tobacco

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

By analyzing existing cross correlation between Union Bank and Ceylon Tobacco, you can compare the effects of market volatilities on Union Bank and Ceylon Tobacco 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 Ceylon Tobacco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Union Bank and Ceylon Tobacco.

Diversification Opportunities for Union Bank and Ceylon Tobacco

0.6

Correlation Coefficient

Union Bank  Ceylon Tobacco

Poor diversification

The 3 months correlation between Union and Ceylon is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Union Bank and Ceylon Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ceylon Tobacco 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 Ceylon Tobacco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ceylon Tobacco has no effect on the direction of Union Bank i.e., Union Bank and Ceylon Tobacco go up and down completely randomly.

Pair Corralation between Union Bank and Ceylon Tobacco

Assuming the 90 days trading horizon Union Bank is expected to under-perform the Ceylon Tobacco. In addition to that, Union Bank is 1.62 times more volatile than Ceylon Tobacco. It trades about -0.06 of its total potential returns per unit of risk. Ceylon Tobacco is currently generating about 0.03 per unit of volatility. If you would invest  132,475  in Ceylon Tobacco on December 26, 2024 and sell it today you would earn a total of  3,075  from holding Ceylon Tobacco or generate 2.32% return on investment over 90 days.

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

Union Bank  vs.  Ceylon Tobacco

Union Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Union Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Ceylon Tobacco

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Ceylon Tobacco are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Ceylon Tobacco is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Union Bank and Ceylon Tobacco

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

The idea behind Union Bank and Ceylon Tobacco 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.