Correlation Between Financial Industries and Davis Financial
Can any of the company-specific risk be diversified away by investing in both Financial Industries 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 Industries 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 Industries Fund and Davis Financial Fund, you can compare the effects of market volatilities on Financial Industries 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 Industries with a short position of Davis Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Industries and Davis Financial.
Diversification Opportunities for Financial Industries and Davis Financial
1.0 | Correlation Coefficient |
No risk reduction
The 3 months correlation between Financial and DAVIS is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries 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 Industries 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 Industries 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 Industries i.e., Financial Industries and Davis Financial go up and down completely randomly.
Pair Corralation between Financial Industries and Davis Financial
Assuming the 90 days horizon Financial Industries Fund is expected to generate 1.23 times more return on investment than Davis Financial. However, Financial Industries is 1.23 times more volatile than Davis Financial Fund. It trades about 0.3 of its potential returns per unit of risk. Davis Financial Fund is currently generating about 0.31 per unit of risk. If you would invest 1,897 in Financial Industries Fund on September 2, 2024 and sell it today you would earn a total of 231.00 from holding Financial Industries Fund or generate 12.18% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Financial Industries Fund vs. Davis Financial Fund
Performance |
| Timeline |
| Financial Industries |
| Davis Financial |
Financial Industries and Davis Financial Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Financial Industries and Davis Financial
The main advantage of trading using opposite Financial Industries and Davis Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Industries 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 Industries 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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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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
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