Correlation Between Davis Financial and Energy Services

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

Diversification Opportunities for Davis Financial and Energy Services

0.5

Correlation Coefficient

Davis Financial  Energy Services

Very weak diversification

The 3 months correlation between Davis and Energy is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Energy Services Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Services 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 Energy Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Services has no effect on the direction of Davis Financial i.e., Davis Financial and Energy Services go up and down completely randomly.

Pair Corralation between Davis Financial and Energy Services

Assuming the 90 days horizon Davis Financial Fund is expected to generate 0.61 times more return on investment than Energy Services. However, Davis Financial Fund is 1.63 times less risky than Energy Services. It trades about 0.18 of its potential returns per unit of risk. Energy Services Fund is currently generating about 0.06 per unit of risk. If you would invest  6,476  in Davis Financial Fund on September 2, 2024 and sell it today you would earn a total of  910.00  from holding Davis Financial Fund or generate 14.05% return on investment over 90 days.

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

Davis Financial Fund  vs.  Energy Services Fund

Davis Financial

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Davis Financial showed solid returns over the last few months and may actually be approaching a breakup point.

Energy Services

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Services Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Energy Services may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Davis Financial and Energy Services

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

The idea behind Davis Financial Fund and Energy Services 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.

Check out your portfolio center.

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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.