Correlation Between Fairfax Financial and United Insurance

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

Diversification Opportunities for Fairfax Financial and United Insurance

0.53

Correlation Coefficient

Fairfax Financial  United Insurance

Very weak diversification

The 3 months correlation between Fairfax and United is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Fairfax Financial Holdings and United Insurance Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United Insurance Holdings 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 United Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Insurance Holdings has no effect on the direction of Fairfax Financial i.e., Fairfax Financial and United Insurance go up and down completely randomly.

Pair Corralation between Fairfax Financial and United Insurance

Assuming the 90 days horizon Fairfax Financial Holdings is expected to generate 0.57 times more return on investment than United Insurance. However, Fairfax Financial Holdings is 1.76 times less risky than United Insurance. It trades about 0.0 of its potential returns per unit of risk. United Insurance Holdings is currently generating about -0.08 per unit of risk. If you would invest  132,498  in Fairfax Financial Holdings on December 30, 2024 and sell it today you would lose (498.00) from holding Fairfax Financial Holdings or give up 0.38% of portfolio value over 90 days.

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

Fairfax Financial Holdings  vs.  United Insurance Holdings

Fairfax Financial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fairfax Financial Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Fairfax Financial is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

United Insurance Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days United Insurance Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Fairfax Financial and United Insurance

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

The idea behind Fairfax Financial Holdings and United Insurance Holdings 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.