Correlation Between Lanka Milk and DFCC Bank

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

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

Diversification Opportunities for Lanka Milk and DFCC Bank

0.82

Correlation Coefficient

Lanka Milk  DFCC Bank

Very poor diversification

The 3 months correlation between Lanka and DFCC is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Lanka Milk Foods and DFCC Bank PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DFCC Bank PLC and Lanka Milk 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 Lanka Milk Foods are associated (or correlated) with DFCC Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DFCC Bank PLC has no effect on the direction of Lanka Milk i.e., Lanka Milk and DFCC Bank go up and down completely randomly.

Pair Corralation between Lanka Milk and DFCC Bank

Assuming the 90 days trading horizon Lanka Milk Foods is expected to generate 1.69 times more return on investment than DFCC Bank. However, Lanka Milk is 1.69 times more volatile than DFCC Bank PLC. It trades about 0.3 of its potential returns per unit of risk. DFCC Bank PLC is currently generating about 0.23 per unit of risk. If you would invest  2,850  in Lanka Milk Foods on September 26, 2024 and sell it today you would earn a total of  1,530  from holding Lanka Milk Foods or generate 53.68% return on investment over 90 days.

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

Lanka Milk Foods  vs.  DFCC Bank PLC

Lanka Milk Foods

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lanka Milk Foods are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lanka Milk sustained solid returns over the last few months and may actually be approaching a breakup point.

DFCC Bank PLC

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in DFCC Bank PLC are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, DFCC Bank sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lanka Milk and DFCC Bank

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

The idea behind Lanka Milk Foods and DFCC Bank 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.