Correlation Between Diamond Hill and Merger Fund

Can any of the company-specific risk be diversified away by investing in both Diamond Hill and Merger Fund 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 Merger Fund 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 Merger Fund, you can compare the effects of market volatilities on Diamond Hill and Merger Fund 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 Merger Fund. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diamond Hill and Merger Fund.

Diversification Opportunities for Diamond Hill and Merger Fund

0.84

Correlation Coefficient

Diamond Hill  Merger Fund

Very poor diversification

The 3 months correlation between Diamond and Merger is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Diamond Hill Long Short and The Merger Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merger Fund 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 Merger Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merger Fund has no effect on the direction of Diamond Hill i.e., Diamond Hill and Merger Fund go up and down completely randomly.

Pair Corralation between Diamond Hill and Merger Fund

Assuming the 90 days horizon Diamond Hill Long Short is expected to under-perform the Merger Fund. In addition to that, Diamond Hill is 2.11 times more volatile than The Merger Fund. It trades about -0.27 of its total potential returns per unit of risk. The Merger Fund is currently generating about -0.15 per unit of volatility. If you would invest  1,758  in The Merger Fund on October 8, 2024 and sell it today you would lose (41.00) from holding The Merger Fund or give up 2.33% of portfolio value over 90 days.

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

Diamond Hill Long Short  vs.  The Merger 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.

Merger Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Merger Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Merger Fund 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 Merger Fund

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

The idea behind Diamond Hill Long Short and The Merger 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.