Correlation Between Tal Lanka and Sri Lanka

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

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

Diversification Opportunities for Tal Lanka and Sri Lanka

0.4

Correlation Coefficient

Tal Lanka  Sri Lanka

Very weak diversification

The 3 months correlation between Tal and Sri is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Tal Lanka Hotels 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 Tal 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 Tal Lanka Hotels 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 Tal Lanka i.e., Tal Lanka and Sri Lanka go up and down completely randomly.

Pair Corralation between Tal Lanka and Sri Lanka

Assuming the 90 days trading horizon Tal Lanka Hotels is expected to generate 1.52 times more return on investment than Sri Lanka. However, Tal Lanka is 1.52 times more volatile than Sri Lanka Telecom. It trades about 0.01 of its potential returns per unit of risk. Sri Lanka Telecom is currently generating about -0.08 per unit of risk. If you would invest  2,170  in Tal Lanka Hotels on September 14, 2024 and sell it today you would lose (70.00) from holding Tal Lanka Hotels or give up 3.23% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	90.23%
Values	Daily Returns

Tal Lanka Hotels  vs.  Sri Lanka Telecom

Tal Lanka Hotels

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tal Lanka Hotels are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Tal Lanka 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 Tal Lanka and Sri Lanka

The main advantage of trading using opposite Tal Lanka and Sri Lanka positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tal Lanka 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 Tal Lanka Hotels 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.