Correlation Between Financial Industries and Davis Financial

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

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

Diversification Opportunities for Financial Industries and Davis Financial

0.63

Correlation Coefficient

Financial Industries  Davis Financial

Poor diversification

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

Pair Corralation between Financial Industries and Davis Financial

Assuming the 90 days horizon Financial Industries Fund is expected to under-perform the Davis Financial. In addition to that, Financial Industries is 1.26 times more volatile than Davis Financial Fund. It trades about -0.1 of its total potential returns per unit of risk. Davis Financial Fund is currently generating about -0.01 per unit of volatility. If you would invest  5,329  in Davis Financial Fund on December 2, 2024 and sell it today you would lose (44.00) from holding Davis Financial Fund or give up 0.83% of portfolio value over 90 days.

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

Financial Industries Fund  vs.  Davis Financial Fund

Financial Industries

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financial Industries Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Davis Financial

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Financial Industries and Davis Financial

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

The idea behind Financial Industries Fund and Davis Financial 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.