Correlation Between First American and Lancashire Holdings

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

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

Diversification Opportunities for First American and Lancashire Holdings

0.15

Correlation Coefficient

First American  Lancashire Holdings

Average diversification

The 3 months correlation between First and Lancashire is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding First American Financial and Lancashire Holdings Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lancashire Holdings and First American 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 First American Financial are associated (or correlated) with Lancashire Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lancashire Holdings has no effect on the direction of First American i.e., First American and Lancashire Holdings go up and down completely randomly.

Pair Corralation between First American and Lancashire Holdings

Assuming the 90 days horizon First American Financial is expected to generate 0.65 times more return on investment than Lancashire Holdings. However, First American Financial is 1.54 times less risky than Lancashire Holdings. It trades about 0.06 of its potential returns per unit of risk. Lancashire Holdings Limited is currently generating about -0.08 per unit of risk. If you would invest  6,000  in First American Financial on December 5, 2024 and sell it today you would earn a total of  100.00  from holding First American Financial or generate 1.67% return on investment over 90 days.

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

First American Financial  vs.  Lancashire Holdings Limited

First American Financial

Risk-Adjusted Performance

Very Weak

Over the last 90 days First American Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, First American is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Lancashire Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lancashire Holdings Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with First American and Lancashire Holdings

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

The idea behind First American Financial and Lancashire Holdings Limited 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.