Correlation Between Diamond Hill and The Arbitrage

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

By analyzing existing cross correlation between Diamond Hill Long Short and The Arbitrage Fund, you can compare the effects of market volatilities on Diamond Hill and The Arbitrage 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 Diamond Hill with a short position of The Arbitrage. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diamond Hill and The Arbitrage.

Diversification Opportunities for Diamond Hill and The Arbitrage

0.71

Correlation Coefficient

Diamond Hill  The Arbitrage

Poor diversification

The 3 months correlation between Diamond and The is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Diamond Hill Long Short and The Arbitrage Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The Arbitrage and Diamond Hill 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 Diamond Hill Long Short are associated (or correlated) with The Arbitrage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The Arbitrage has no effect on the direction of Diamond Hill i.e., Diamond Hill and The Arbitrage go up and down completely randomly.

Pair Corralation between Diamond Hill and The Arbitrage

Assuming the 90 days horizon Diamond Hill Long Short is expected to under-perform the The Arbitrage. In addition to that, Diamond Hill is 3.79 times more volatile than The Arbitrage Fund. It trades about -0.13 of its total potential returns per unit of risk. The Arbitrage Fund is currently generating about -0.01 per unit of volatility. If you would invest  1,296  in The Arbitrage Fund on October 8, 2024 and sell it today you would lose (2.00) from holding The Arbitrage Fund or give up 0.15% of portfolio value over 90 days.

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

Diamond Hill Long Short  vs.  The Arbitrage Fund

Diamond Hill Long

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diamond Hill Long Short has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

The Arbitrage

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Arbitrage Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, The Arbitrage is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Diamond Hill and The Arbitrage

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

The idea behind Diamond Hill Long Short and The Arbitrage Fund 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.