Correlation Between IShares Financial and Davis Select

Can any of the company-specific risk be diversified away by investing in both IShares Financial and Davis Select 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 IShares Financial and Davis Select into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between iShares Financial Services and Davis Select Financial, you can compare the effects of market volatilities on IShares Financial and Davis Select 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 IShares Financial with a short position of Davis Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Financial and Davis Select.

Diversification Opportunities for IShares Financial and Davis Select

0.99

Correlation Coefficient

IShares Financial  Davis Select

No risk reduction

The 3 months correlation between IShares and Davis is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding iShares Financial Services and Davis Select Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Select Financial and IShares 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 iShares Financial Services are associated (or correlated) with Davis Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Select Financial has no effect on the direction of IShares Financial i.e., IShares Financial and Davis Select go up and down completely randomly.

Pair Corralation between IShares Financial and Davis Select

Considering the 90-day investment horizon iShares Financial Services is expected to generate 1.02 times more return on investment than Davis Select. However, IShares Financial is 1.02 times more volatile than Davis Select Financial. It trades about 0.18 of its potential returns per unit of risk. Davis Select Financial is currently generating about 0.15 per unit of risk. If you would invest  7,080  in iShares Financial Services on September 3, 2024 and sell it today you would earn a total of  1,076  from holding iShares Financial Services or generate 15.2% return on investment over 90 days.

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

iShares Financial Services  vs.  Davis Select Financial

iShares Financial

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Financial Services are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, IShares Financial reported solid returns over the last few months and may actually be approaching a breakup point.

Davis Select Financial

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Select Financial are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite unsteady basic indicators, Davis Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares Financial and Davis Select

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

The idea behind iShares Financial Services and Davis Select Financial 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.