Correlation Between Legg Mason and Dodge Cox

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

By analyzing existing cross correlation between Legg Mason Bw and Dodge Stock Fund, you can compare the effects of market volatilities on Legg Mason and Dodge Cox 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 Legg Mason with a short position of Dodge Cox. Check out your portfolio center. Please also check ongoing floating volatility patterns of Legg Mason and Dodge Cox.

Diversification Opportunities for Legg Mason and Dodge Cox

0.87

Correlation Coefficient

Legg Mason  Dodge Cox

Very poor diversification

The 3 months correlation between Legg and Dodge is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Legg Mason Bw and Dodge Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dodge Stock Fund and Legg Mason 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 Legg Mason Bw are associated (or correlated) with Dodge Cox. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dodge Stock Fund has no effect on the direction of Legg Mason i.e., Legg Mason and Dodge Cox go up and down completely randomly.

Pair Corralation between Legg Mason and Dodge Cox

Assuming the 90 days horizon Legg Mason Bw is expected to generate 0.94 times more return on investment than Dodge Cox. However, Legg Mason Bw is 1.06 times less risky than Dodge Cox. It trades about 0.09 of its potential returns per unit of risk. Dodge Stock Fund is currently generating about 0.08 per unit of risk. If you would invest  1,511  in Legg Mason Bw on December 1, 2024 and sell it today you would earn a total of  606.00  from holding Legg Mason Bw or generate 40.11% return on investment over 90 days.

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

Legg Mason Bw  vs.  Dodge Stock Fund

Legg Mason Bw

Risk-Adjusted Performance

Very Weak

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

Dodge Stock Fund

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Legg Mason and Dodge Cox

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

The idea behind Legg Mason Bw and Dodge Stock 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.