Correlation Between Davis Government and Hennessy

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

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

Diversification Opportunities for Davis Government and Hennessy

0.3

Correlation Coefficient

Davis Government  Hennessy

Weak diversification

The 3 months correlation between Davis and Hennessy is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Davis Government Bond and Hennessy Bp Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hennessy Bp Energy and Davis Government 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 Davis Government Bond are associated (or correlated) with Hennessy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hennessy Bp Energy has no effect on the direction of Davis Government i.e., Davis Government and Hennessy go up and down completely randomly.

Pair Corralation between Davis Government and Hennessy

Assuming the 90 days horizon Davis Government is expected to generate 11.58 times less return on investment than Hennessy. But when comparing it to its historical volatility, Davis Government Bond is 8.37 times less risky than Hennessy. It trades about 0.12 of its potential returns per unit of risk. Hennessy Bp Energy is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  2,613  in Hennessy Bp Energy on October 23, 2024 and sell it today you would earn a total of  311.00  from holding Hennessy Bp Energy or generate 11.9% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Davis Government Bond  vs.  Hennessy Bp Energy

Davis Government Bond

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Government Bond are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Davis Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Hennessy Bp Energy

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Hennessy Bp Energy are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Hennessy may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Davis Government and Hennessy

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

The idea behind Davis Government Bond and Hennessy Bp Energy 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.