Correlation Between Davis Financial and Northern Small

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

Diversification Opportunities for Davis Financial and Northern Small

0.63

Correlation Coefficient

Davis Financial  Northern Small

Poor diversification

The 3 months correlation between Davis and Northern is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Northern Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Small Cap 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 Northern Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Small Cap has no effect on the direction of Davis Financial i.e., Davis Financial and Northern Small go up and down completely randomly.

Pair Corralation between Davis Financial and Northern Small

Assuming the 90 days horizon Davis Financial Fund is expected to generate 0.77 times more return on investment than Northern Small. However, Davis Financial Fund is 1.3 times less risky than Northern Small. It trades about 0.08 of its potential returns per unit of risk. Northern Small Cap is currently generating about 0.02 per unit of risk. If you would invest  4,361  in Davis Financial Fund on October 5, 2024 and sell it today you would earn a total of  2,010  from holding Davis Financial Fund or generate 46.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.78%
Values	Daily Returns

Davis Financial Fund  vs.  Northern Small Cap

Davis Financial

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 2 (%) 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.

Northern Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northern 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 February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Davis Financial and Northern Small

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

The idea behind Davis Financial Fund and Northern 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.