Correlation Between Davis Financial and Financial Industries

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

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

Diversification Opportunities for Davis Financial and Financial Industries

1.0

Correlation Coefficient

Davis Financial  Financial Industries

No risk reduction

The 3 months correlation between DAVIS and Financial is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Financial Industries Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Industries and Davis 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 Davis Financial Fund are associated (or correlated) with Financial Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Industries has no effect on the direction of Davis Financial i.e., Davis Financial and Financial Industries go up and down completely randomly.

Pair Corralation between Davis Financial and Financial Industries

Assuming the 90 days horizon Davis Financial is expected to generate 1.24 times less return on investment than Financial Industries. But when comparing it to its historical volatility, Davis Financial Fund is 1.13 times less risky than Financial Industries. It trades about 0.18 of its potential returns per unit of risk. Financial Industries Fund is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  1,528  in Financial Industries Fund on September 2, 2024 and sell it today you would earn a total of  270.00  from holding Financial Industries Fund or generate 17.67% return on investment over 90 days.

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

Davis Financial Fund  vs.  Financial Industries Fund

Davis Financial

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Davis Financial showed solid returns over the last few months and may actually be approaching a breakup point.

Financial Industries

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Industries Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Financial Industries showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Davis Financial and Financial Industries

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

The idea behind Davis Financial Fund and Financial Industries 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..