Correlation Between Davis Financial and Davis Opportunity

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

Diversification Opportunities for Davis Financial and Davis Opportunity

0.67

Correlation Coefficient

Davis Financial  Davis Opportunity

Poor diversification

The 3 months correlation between Davis and Davis is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Davis Opportunity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Opportunity 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 Davis Opportunity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Opportunity has no effect on the direction of Davis Financial i.e., Davis Financial and Davis Opportunity go up and down completely randomly.

Pair Corralation between Davis Financial and Davis Opportunity

Assuming the 90 days horizon Davis Financial Fund is expected to generate 1.05 times more return on investment than Davis Opportunity. However, Davis Financial is 1.05 times more volatile than Davis Opportunity. It trades about 0.12 of its potential returns per unit of risk. Davis Opportunity is currently generating about -0.04 per unit of risk. If you would invest  6,710  in Davis Financial Fund on December 4, 2024 and sell it today you would earn a total of  137.00  from holding Davis Financial Fund or generate 2.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

Davis Financial Fund  vs.  Davis Opportunity

Davis Financial

Risk-Adjusted Performance

Very Weak

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

Davis Opportunity

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Davis Financial and Davis Opportunity

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

The idea behind Davis Financial Fund and Davis Opportunity 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.