Correlation Between Davis Financial and Balanced Strategy

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

By analyzing existing cross correlation between Davis Financial Fund and Balanced Strategy Fund, you can compare the effects of market volatilities on Davis Financial and Balanced Strategy 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 Davis Financial with a short position of Balanced Strategy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Davis Financial and Balanced Strategy.

Diversification Opportunities for Davis Financial and Balanced Strategy

0.63

Correlation Coefficient

Davis Financial  Balanced Strategy

Poor diversification

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

Pair Corralation between Davis Financial and Balanced Strategy

Assuming the 90 days horizon Davis Financial Fund is expected to under-perform the Balanced Strategy. In addition to that, Davis Financial is 2.1 times more volatile than Balanced Strategy Fund. It trades about -0.28 of its total potential returns per unit of risk. Balanced Strategy Fund is currently generating about -0.24 per unit of volatility. If you would invest  1,107  in Balanced Strategy Fund on October 10, 2024 and sell it today you would lose (32.00) from holding Balanced Strategy Fund or give up 2.89% of portfolio value over 90 days.

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

Davis Financial Fund  vs.  Balanced Strategy Fund

Davis Financial

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Davis Financial is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Balanced Strategy

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Davis Financial and Balanced Strategy

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

The idea behind Davis Financial Fund and Balanced Strategy 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.