Correlation Between Davis Government and Wasatch Small

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

Diversification Opportunities for Davis Government and Wasatch Small

0.03

Correlation Coefficient

Davis Government  Wasatch Small

Significant diversification

The 3 months correlation between Davis and Wasatch is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Davis Government Bond and Wasatch Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wasatch Small Cap 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 Wasatch Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wasatch Small Cap has no effect on the direction of Davis Government i.e., Davis Government and Wasatch Small go up and down completely randomly.

Pair Corralation between Davis Government and Wasatch Small

Assuming the 90 days horizon Davis Government Bond is expected to generate 0.06 times more return on investment than Wasatch Small. However, Davis Government Bond is 15.71 times less risky than Wasatch Small. It trades about 0.1 of its potential returns per unit of risk. Wasatch Small Cap is currently generating about -0.02 per unit of risk. If you would invest  501.00  in Davis Government Bond on September 30, 2024 and sell it today you would earn a total of  8.00  from holding Davis Government Bond or generate 1.6% return on investment over 90 days.

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

Davis Government Bond  vs.  Wasatch Small Cap

Davis Government Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Davis Government Bond has generated negative risk-adjusted returns adding no value to fund investors. 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.

Wasatch Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wasatch Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Davis Government and Wasatch Small

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

The idea behind Davis Government Bond and Wasatch Small Cap 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.