Correlation Between IShares MSCI and Davis Select

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

By analyzing existing cross correlation between iShares MSCI ACWI and Davis Select Worldwide, you can compare the effects of market volatilities on IShares MSCI and Davis Select 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 IShares MSCI with a short position of Davis Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and Davis Select.

Diversification Opportunities for IShares MSCI and Davis Select

0.63

Correlation Coefficient

IShares MSCI  Davis Select

Poor diversification

The 3 months correlation between IShares and Davis is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI ACWI and Davis Select Worldwide in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Select Worldwide and IShares MSCI 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 iShares MSCI ACWI are associated (or correlated) with Davis Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Select Worldwide has no effect on the direction of IShares MSCI i.e., IShares MSCI and Davis Select go up and down completely randomly.

Pair Corralation between IShares MSCI and Davis Select

Given the investment horizon of 90 days IShares MSCI is expected to generate 1.76 times less return on investment than Davis Select. But when comparing it to its historical volatility, iShares MSCI ACWI is 2.45 times less risky than Davis Select. It trades about 0.15 of its potential returns per unit of risk. Davis Select Worldwide is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,453  in Davis Select Worldwide on September 17, 2024 and sell it today you would earn a total of  342.66  from holding Davis Select Worldwide or generate 9.92% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

iShares MSCI ACWI  vs.  Davis Select Worldwide

iShares MSCI ACWI

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI ACWI are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental drivers, IShares MSCI is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Davis Select Worldwide

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Select Worldwide are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent essential indicators, Davis Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares MSCI and Davis Select

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

The idea behind iShares MSCI ACWI and Davis Select Worldwide 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.