Correlation Between Fairfax Financial and Bank of America
Can any of the company-specific risk be diversified away by investing in both Fairfax Financial and Bank of America 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 Fairfax Financial and Bank of America into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Fairfax Financial Holdings and Bank of America, you can compare the effects of market volatilities on Fairfax Financial and Bank of America 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 Fairfax Financial with a short position of Bank of America. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fairfax Financial and Bank of America.
Diversification Opportunities for Fairfax Financial and Bank of America
0.86 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Fairfax and Bank is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Fairfax Financial Holdings and Bank of America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of America and Fairfax 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 Fairfax Financial Holdings are associated (or correlated) with Bank of America. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of America has no effect on the direction of Fairfax Financial i.e., Fairfax Financial and Bank of America go up and down completely randomly.
Pair Corralation between Fairfax Financial and Bank of America
Assuming the 90 days trading horizon Fairfax Financial is expected to generate 3.83 times less return on investment than Bank of America. But when comparing it to its historical volatility, Fairfax Financial Holdings is 4.6 times less risky than Bank of America. It trades about 0.37 of its potential returns per unit of risk. Bank of America is currently generating about 0.31 of returns per unit of risk over similar time horizon. If you would invest 2,177 in Bank of America on September 1, 2024 and sell it today you would earn a total of 311.00 from holding Bank of America or generate 14.29% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Fairfax Financial Holdings vs. Bank of America
Performance |
| Timeline |
| Fairfax Financial |
| Bank of America |
Fairfax Financial and Bank of America Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Fairfax Financial and Bank of America
The main advantage of trading using opposite Fairfax Financial and Bank of America positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fairfax Financial position performs unexpectedly, Bank of America 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 Bank of America will offset losses from the drop in Bank of America's long position.| Fairfax Financial vs. Fairfax Financial Holdings | Fairfax Financial vs. iShares Canadian HYBrid | Fairfax Financial vs. Brompton European Dividend | Fairfax Financial vs. Solar Alliance Energy |
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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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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