Correlation Between Fairfax Financial and Definity Financial

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

Diversification Opportunities for Fairfax Financial and Definity Financial

0.7
  Correlation Coefficient

Poor diversification

The 3 months correlation between Fairfax and Definity is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Fairfax Financial Holdings and Definity Financial Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Definity Financial Corp 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 Definity Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Definity Financial Corp has no effect on the direction of Fairfax Financial i.e., Fairfax Financial and Definity Financial go up and down completely randomly.

Pair Corralation between Fairfax Financial and Definity Financial

Assuming the 90 days trading horizon Fairfax Financial Holdings is expected to generate 1.35 times more return on investment than Definity Financial. However, Fairfax Financial is 1.35 times more volatile than Definity Financial Corp. It trades about 0.16 of its potential returns per unit of risk. Definity Financial Corp is currently generating about 0.2 per unit of risk. If you would invest  1,877  in Fairfax Financial Holdings on September 6, 2024 and sell it today you would earn a total of  372.00  from holding Fairfax Financial Holdings or generate 19.82% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy98.44%
ValuesDaily Returns

Fairfax Financial Holdings  vs.  Definity Financial Corp

 Performance 
       Timeline  
Fairfax Financial 

Risk-Adjusted Performance

12 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Fairfax Financial Holdings are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating technical indicators, Fairfax Financial sustained solid returns over the last few months and may actually be approaching a breakup point.
Definity Financial Corp 

Risk-Adjusted Performance

16 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Definity Financial Corp are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Definity Financial displayed solid returns over the last few months and may actually be approaching a breakup point.

Fairfax Financial and Definity Financial Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Fairfax Financial and Definity Financial

The main advantage of trading using opposite Fairfax Financial and Definity Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fairfax Financial position performs unexpectedly, Definity Financial 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 Definity Financial will offset losses from the drop in Definity Financial's long position.
The idea behind Fairfax Financial Holdings and Definity Financial Corp 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.

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