Correlation Between Fairfax Financial and Bank of Nova Scotia

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

Diversification Opportunities for Fairfax Financial and Bank of Nova Scotia

0.88

Correlation Coefficient

Fairfax Financial  Bank of Nova Scotia

Very poor diversification

The 3 months correlation between Fairfax and Bank is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Fairfax Financial Holdings and Bank of Nova in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Nova Scotia 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 Nova Scotia. 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 Nova Scotia has no effect on the direction of Fairfax Financial i.e., Fairfax Financial and Bank of Nova Scotia go up and down completely randomly.

Pair Corralation between Fairfax Financial and Bank of Nova Scotia

Assuming the 90 days trading horizon Fairfax Financial Holdings is expected to generate 0.82 times more return on investment than Bank of Nova Scotia. However, Fairfax Financial Holdings is 1.22 times less risky than Bank of Nova Scotia. It trades about -0.06 of its potential returns per unit of risk. Bank of Nova is currently generating about -0.16 per unit of risk. If you would invest  2,387  in Fairfax Financial Holdings on September 28, 2024 and sell it today you would lose (22.00) from holding Fairfax Financial Holdings or give up 0.92% of portfolio value 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 Nova

Fairfax Financial

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fairfax Financial Holdings are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong technical indicators, Fairfax Financial is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Bank of Nova Scotia

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Nova are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Bank of Nova Scotia is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Fairfax Financial and Bank of Nova Scotia

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

The idea behind Fairfax Financial Holdings and Bank of Nova 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.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.