Correlation Between Davis Financial and Davis Opportunity

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

Diversification Opportunities for Davis Financial and Davis Opportunity

0.96

Correlation Coefficient

Davis Financial  Davis Opportunity

Almost no diversification

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

Pair Corralation between Davis Financial and Davis Opportunity

Assuming the 90 days horizon Davis Financial Fund is expected to generate 1.22 times more return on investment than Davis Opportunity. However, Davis Financial is 1.22 times more volatile than Davis Opportunity Fund. It trades about 0.2 of its potential returns per unit of risk. Davis Opportunity Fund is currently generating about 0.15 per unit of risk. If you would invest  4,602  in Davis Financial Fund on September 12, 2024 and sell it today you would earn a total of  676.00  from holding Davis Financial Fund or generate 14.69% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Davis Financial Fund  vs.  Davis Opportunity Fund

Davis Financial

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Davis Financial showed solid returns over the last few months and may actually be approaching a breakup point.

Davis Opportunity

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Opportunity Fund are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Davis Opportunity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Davis Financial and Davis Opportunity

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

The idea behind Davis Financial Fund and Davis Opportunity 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.