Correlation Between Davis Financial and Financials Ultrasector

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

Diversification Opportunities for Davis Financial and Financials Ultrasector

0.93

Correlation Coefficient

Davis Financial  Financials Ultrasector

Almost no diversification

The 3 months correlation between Davis and Financials is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Financials Ultrasector Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financials Ultrasector 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 Financials Ultrasector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financials Ultrasector has no effect on the direction of Davis Financial i.e., Davis Financial and Financials Ultrasector go up and down completely randomly.

Pair Corralation between Davis Financial and Financials Ultrasector

Assuming the 90 days horizon Davis Financial Fund is expected to under-perform the Financials Ultrasector. But the mutual fund apears to be less risky and, when comparing its historical volatility, Davis Financial Fund is 1.2 times less risky than Financials Ultrasector. The mutual fund trades about -0.28 of its potential returns per unit of risk. The Financials Ultrasector Profund is currently generating about -0.17 of returns per unit of risk over similar time horizon. If you would invest  3,547  in Financials Ultrasector Profund on October 8, 2024 and sell it today you would lose (182.00) from holding Financials Ultrasector Profund or give up 5.13% of portfolio value over 90 days.

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

Davis Financial Fund  vs.  Financials Ultrasector Profund

Davis Financial

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and 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.

Financials Ultrasector

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Financials Ultrasector Profund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Financials Ultrasector may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Davis Financial and Financials Ultrasector

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

The idea behind Davis Financial Fund and Financials Ultrasector Profund 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.