Correlation Between Davis Financial and Third Avenue

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

Diversification Opportunities for Davis Financial and Third Avenue

0.81

Correlation Coefficient

Davis Financial  Third Avenue

Very poor diversification

The 3 months correlation between Davis and Third is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Third Avenue Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Third Avenue Real 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 Third Avenue. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Third Avenue Real has no effect on the direction of Davis Financial i.e., Davis Financial and Third Avenue go up and down completely randomly.

Pair Corralation between Davis Financial and Third Avenue

Assuming the 90 days horizon Davis Financial Fund is expected to under-perform the Third Avenue. In addition to that, Davis Financial is 1.49 times more volatile than Third Avenue Real. It trades about -0.04 of its total potential returns per unit of risk. Third Avenue Real is currently generating about -0.05 per unit of volatility. If you would invest  2,386  in Third Avenue Real on December 4, 2024 and sell it today you would lose (18.00) from holding Third Avenue Real or give up 0.75% of portfolio value over 90 days.

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

Davis Financial Fund  vs.  Third Avenue Real

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.

Third Avenue Real

Risk-Adjusted Performance

Very Weak

Over the last 90 days Third Avenue Real has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Davis Financial and Third Avenue

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

The idea behind Davis Financial Fund and Third Avenue Real 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.