Correlation Between Davenport Small and Davenport Core

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

By analyzing existing cross correlation between Davenport Small Cap and Davenport E Fund, you can compare the effects of market volatilities on Davenport Small and Davenport Core 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 Davenport Small with a short position of Davenport Core. Check out your portfolio center. Please also check ongoing floating volatility patterns of Davenport Small and Davenport Core.

Diversification Opportunities for Davenport Small and Davenport Core

0.75

Correlation Coefficient

Davenport Small  Davenport Core

Poor diversification

The 3 months correlation between Davenport and Davenport is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Davenport Small Cap and Davenport E Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davenport E Fund and Davenport Small 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 Davenport Small Cap are associated (or correlated) with Davenport Core. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davenport E Fund has no effect on the direction of Davenport Small i.e., Davenport Small and Davenport Core go up and down completely randomly.

Pair Corralation between Davenport Small and Davenport Core

Assuming the 90 days horizon Davenport Small Cap is expected to under-perform the Davenport Core. In addition to that, Davenport Small is 1.27 times more volatile than Davenport E Fund. It trades about -0.21 of its total potential returns per unit of risk. Davenport E Fund is currently generating about -0.05 per unit of volatility. If you would invest  3,757  in Davenport E Fund on December 1, 2024 and sell it today you would lose (34.00) from holding Davenport E Fund or give up 0.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Davenport Small Cap  vs.  Davenport E Fund

Davenport Small Cap

Risk-Adjusted Performance

Very Weak

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

Davenport E Fund

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Davenport Small and Davenport Core

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

The idea behind Davenport Small Cap and Davenport E 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.