Correlation Between Union Chemicals and Arpico Insurance

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

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

Diversification Opportunities for Union Chemicals and Arpico Insurance

0.68

Correlation Coefficient

Union Chemicals  Arpico Insurance

Poor diversification

The 3 months correlation between Union and Arpico is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Union Chemicals Lanka and Arpico Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arpico Insurance and Union Chemicals 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 Chemicals Lanka are associated (or correlated) with Arpico Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arpico Insurance has no effect on the direction of Union Chemicals i.e., Union Chemicals and Arpico Insurance go up and down completely randomly.

Pair Corralation between Union Chemicals and Arpico Insurance

Assuming the 90 days trading horizon Union Chemicals is expected to generate 1.17 times less return on investment than Arpico Insurance. But when comparing it to its historical volatility, Union Chemicals Lanka is 1.78 times less risky than Arpico Insurance. It trades about 0.16 of its potential returns per unit of risk. Arpico Insurance is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2,190  in Arpico Insurance on September 15, 2024 and sell it today you would earn a total of  240.00  from holding Arpico Insurance or generate 10.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	79.25%
Values	Daily Returns

Union Chemicals Lanka  vs.  Arpico Insurance

Union Chemicals Lanka

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Union Chemicals Lanka are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Union Chemicals sustained solid returns over the last few months and may actually be approaching a breakup point.

Arpico Insurance

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Arpico Insurance are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Arpico Insurance sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Union Chemicals and Arpico Insurance

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

The idea behind Union Chemicals Lanka and Arpico Insurance 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.