Correlation Between Sri Lanka and Ceylinco Insurance

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

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

Diversification Opportunities for Sri Lanka and Ceylinco Insurance

0.06

Correlation Coefficient

Sri Lanka  Ceylinco Insurance

Significant diversification

The 3 months correlation between Sri and Ceylinco is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Sri Lanka Telecom and Ceylinco Insurance PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ceylinco Insurance PLC and Sri Lanka 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 Sri Lanka Telecom are associated (or correlated) with Ceylinco Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ceylinco Insurance PLC has no effect on the direction of Sri Lanka i.e., Sri Lanka and Ceylinco Insurance go up and down completely randomly.

Pair Corralation between Sri Lanka and Ceylinco Insurance

Assuming the 90 days trading horizon Sri Lanka is expected to generate 4.3 times less return on investment than Ceylinco Insurance. But when comparing it to its historical volatility, Sri Lanka Telecom is 1.25 times less risky than Ceylinco Insurance. It trades about 0.06 of its potential returns per unit of risk. Ceylinco Insurance PLC is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  245,025  in Ceylinco Insurance PLC on September 26, 2024 and sell it today you would earn a total of  54,975  from holding Ceylinco Insurance PLC or generate 22.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	62.3%
Values	Daily Returns

Sri Lanka Telecom  vs.  Ceylinco Insurance PLC

Sri Lanka Telecom

Risk-Adjusted Performance

4 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Sri Lanka Telecom are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sri Lanka may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Ceylinco Insurance PLC

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Ceylinco Insurance PLC are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ceylinco Insurance sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Sri Lanka and Ceylinco Insurance

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

The idea behind Sri Lanka Telecom and Ceylinco Insurance 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.

Check out your portfolio center.

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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.