Correlation Between Fairfax Financial and Constellation Software

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

Diversification Opportunities for Fairfax Financial and Constellation Software

0.79

Correlation Coefficient

Fairfax Financial  Constellation Software

Poor diversification

The 3 months correlation between Fairfax and Constellation is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Fairfax Financial Holdings and Constellation Software in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Constellation Software 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 Constellation Software. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Constellation Software has no effect on the direction of Fairfax Financial i.e., Fairfax Financial and Constellation Software go up and down completely randomly.

Pair Corralation between Fairfax Financial and Constellation Software

Assuming the 90 days trading horizon Fairfax Financial Holdings is expected to generate 1.32 times more return on investment than Constellation Software. However, Fairfax Financial is 1.32 times more volatile than Constellation Software. It trades about 0.2 of its potential returns per unit of risk. Constellation Software is currently generating about 0.15 per unit of risk. If you would invest  162,500  in Fairfax Financial Holdings on September 4, 2024 and sell it today you would earn a total of  37,621  from holding Fairfax Financial Holdings or generate 23.15% return on investment over 90 days.

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

Fairfax Financial Holdings  vs.  Constellation Software

Fairfax Financial

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Fairfax Financial Holdings are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical indicators, Fairfax Financial displayed solid returns over the last few months and may actually be approaching a breakup point.

Constellation Software

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Constellation Software are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Constellation Software may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Fairfax Financial and Constellation Software

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

The idea behind Fairfax Financial Holdings and Constellation Software 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.