Correlation Between Premium Income and Fairfax Financial

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

By analyzing existing cross correlation between Premium Income and Fairfax Financial Holdings, you can compare the effects of market volatilities on Premium Income and Fairfax 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 Premium Income with a short position of Fairfax Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Premium Income and Fairfax Financial.

Diversification Opportunities for Premium Income and Fairfax Financial

-0.24

Correlation Coefficient

Premium Income  Fairfax Financial

Very good diversification

The 3 months correlation between Premium and Fairfax is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Premium Income and Fairfax Financial Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fairfax Financial and Premium Income 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 Premium Income are associated (or correlated) with Fairfax Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fairfax Financial has no effect on the direction of Premium Income i.e., Premium Income and Fairfax Financial go up and down completely randomly.

Pair Corralation between Premium Income and Fairfax Financial

Assuming the 90 days trading horizon Premium Income is expected to generate 2.32 times less return on investment than Fairfax Financial. But when comparing it to its historical volatility, Premium Income is 1.05 times less risky than Fairfax Financial. It trades about 0.08 of its potential returns per unit of risk. Fairfax Financial Holdings is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  1,872  in Fairfax Financial Holdings on September 13, 2024 and sell it today you would earn a total of  383.00  from holding Fairfax Financial Holdings or generate 20.46% return on investment over 90 days.

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

Premium Income  vs.  Fairfax Financial Holdings

Premium Income

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Premium Income are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Premium Income may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Fairfax Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Fairfax Financial Holdings are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating technical indicators, Fairfax Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Premium Income and Fairfax Financial

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

The idea behind Premium Income and Fairfax Financial Holdings 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.