Correlation Between Fairfax Financial and Laurentian Bank

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

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

Diversification Opportunities for Fairfax Financial and Laurentian Bank

-0.59

Correlation Coefficient

Fairfax Financial  Laurentian Bank

Excellent diversification

The 3 months correlation between Fairfax and Laurentian is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Fairfax Financial Holdings and Laurentian Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Laurentian Bank and Fairfax 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 Fairfax Financial Holdings are associated (or correlated) with Laurentian Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Laurentian Bank has no effect on the direction of Fairfax Financial i.e., Fairfax Financial and Laurentian Bank go up and down completely randomly.

Pair Corralation between Fairfax Financial and Laurentian Bank

Assuming the 90 days trading horizon Fairfax Financial Holdings is expected to generate 2.23 times more return on investment than Laurentian Bank. However, Fairfax Financial is 2.23 times more volatile than Laurentian Bank. It trades about 0.1 of its potential returns per unit of risk. Laurentian Bank is currently generating about -0.05 per unit of risk. If you would invest  2,222  in Fairfax Financial Holdings on December 25, 2024 and sell it today you would earn a total of  276.00  from holding Fairfax Financial Holdings or generate 12.42% return on investment over 90 days.

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

Fairfax Financial Holdings  vs.  Laurentian Bank

Fairfax Financial

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fairfax Financial Holdings are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat abnormal technical indicators, Fairfax Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Laurentian Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Laurentian Bank has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Laurentian Bank is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Fairfax Financial and Laurentian Bank

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

The idea behind Fairfax Financial Holdings and Laurentian Bank 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.