Correlation Between Keells Food and Sri Lanka

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

By analyzing existing cross correlation between Keells Food Products and Sri Lanka Telecom, you can compare the effects of market volatilities on Keells Food and Sri Lanka 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 Keells Food with a short position of Sri Lanka. Check out your portfolio center. Please also check ongoing floating volatility patterns of Keells Food and Sri Lanka.

Diversification Opportunities for Keells Food and Sri Lanka

0.51

Correlation Coefficient

Keells Food  Sri Lanka

Very weak diversification

The 3 months correlation between Keells and Sri is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Keells Food Products and Sri Lanka Telecom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sri Lanka Telecom and Keells Food 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 Keells Food Products are associated (or correlated) with Sri Lanka. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sri Lanka Telecom has no effect on the direction of Keells Food i.e., Keells Food and Sri Lanka go up and down completely randomly.

Pair Corralation between Keells Food and Sri Lanka

Assuming the 90 days trading horizon Keells Food is expected to generate 1.01 times less return on investment than Sri Lanka. But when comparing it to its historical volatility, Keells Food Products is 1.4 times less risky than Sri Lanka. It trades about 0.19 of its potential returns per unit of risk. Sri Lanka Telecom is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  5,600  in Sri Lanka Telecom on September 15, 2024 and sell it today you would earn a total of  1,120  from holding Sri Lanka Telecom or generate 20.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	78.33%
Values	Daily Returns

Keells Food Products  vs.  Sri Lanka Telecom

Keells Food Products

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Keells Food Products are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Keells Food sustained solid returns over the last few months and may actually be approaching a breakup point.

Sri Lanka Telecom

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sri Lanka Telecom are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sri Lanka sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Keells Food and Sri Lanka

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

The idea behind Keells Food Products and Sri Lanka Telecom 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.