Correlation Between Davis Financial and Royce Opportunity

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

Diversification Opportunities for Davis Financial and Royce Opportunity

0.9

Correlation Coefficient

Davis Financial  Royce Opportunity

Almost no diversification

The 3 months correlation between Davis and Royce is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Royce Opportunity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce 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 Royce Opportunity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Opportunity has no effect on the direction of Davis Financial i.e., Davis Financial and Royce Opportunity go up and down completely randomly.

Pair Corralation between Davis Financial and Royce Opportunity

Assuming the 90 days horizon Davis Financial is expected to generate 1.0 times less return on investment than Royce Opportunity. But when comparing it to its historical volatility, Davis Financial Fund is 1.15 times less risky than Royce Opportunity. It trades about 0.2 of its potential returns per unit of risk. Royce Opportunity Fund is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,388  in Royce Opportunity Fund on September 12, 2024 and sell it today you would earn a total of  206.00  from holding Royce Opportunity Fund or generate 14.84% 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.  Royce Opportunity Fund

Davis Financial

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 15 (%) 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.

Royce Opportunity

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Opportunity Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Royce Opportunity showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Davis Financial and Royce Opportunity

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

The idea behind Davis Financial Fund and Royce Opportunity 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.

Check out your portfolio center.

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.