Correlation Between Financial Services and Davis Financial

Can any of the company-specific risk be diversified away by investing in both Financial Services and Davis Financial 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 Financial Services and Davis Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Financial Services Fund and Davis Financial Fund, you can compare the effects of market volatilities on Financial Services and Davis Financial 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 Financial Services with a short position of Davis Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Davis Financial.

Diversification Opportunities for Financial Services and Davis Financial

0.96

Correlation Coefficient

Financial Services  Davis Financial

Almost no diversification

The 3 months correlation between Financial and Davis is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Fund and Davis Financial Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Financial and Financial Services 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 Financial Services Fund are associated (or correlated) with Davis Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Financial has no effect on the direction of Financial Services i.e., Financial Services and Davis Financial go up and down completely randomly.

Pair Corralation between Financial Services and Davis Financial

Assuming the 90 days horizon Financial Services Fund is expected to under-perform the Davis Financial. But the mutual fund apears to be less risky and, when comparing its historical volatility, Financial Services Fund is 1.13 times less risky than Davis Financial. The mutual fund trades about -0.01 of its potential returns per unit of risk. The Davis Financial Fund is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  5,301  in Davis Financial Fund on December 3, 2024 and sell it today you would lose (16.00) from holding Davis Financial Fund or give up 0.3% of portfolio value over 90 days.

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

Financial Services Fund  vs.  Davis Financial Fund

Financial Services

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financial Services Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Financial Services is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 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.

Pair Trading with Financial Services and Davis Financial

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

The idea behind Financial Services Fund and Davis Financial 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.

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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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.