Can any of the company-specific risk be diversified away by investing in both Davis Select and OShares Europe 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 Select and OShares Europe into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Davis Select International and OShares Europe Quality, you can compare the effects of market volatilities on Davis Select and OShares Europe 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 Select with a short position of OShares Europe. Check out your portfolio center. Please also check ongoing floating volatility patterns of Davis Select and OShares Europe.
Diversification Opportunities for Davis Select and OShares Europe
The 3 months correlation between Davis and OShares is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Davis Select International and OShares Europe Quality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on OShares Europe Quality and Davis Select 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 Select International are associated (or correlated) with OShares Europe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of OShares Europe Quality has no effect on the direction of Davis Select i.e., Davis Select and OShares Europe go up and down completely randomly.
Pair Corralation between Davis Select and OShares Europe
Given the investment horizon of 90 days Davis Select is expected to generate 8.63 times less return on investment than OShares Europe. In addition to that, Davis Select is 1.77 times more volatile than OShares Europe Quality. It trades about 0.03 of its total potential returns per unit of risk. OShares Europe Quality is currently generating about 0.53 per unit of volatility. If you would invest 2,580 in OShares Europe Quality on September 7, 2023 and sell it today you would earn a total of 188.00 from holding OShares Europe Quality or generate 7.29% return on investment over 90 days.
Over the last 90 days Davis Select International has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Davis Select is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.
Compared to the overall equity markets, risk-adjusted returns on investments in OShares Europe Quality are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, OShares Europe is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.
Davis Select and OShares Europe Volatility Contrast
Predicted Return Density
Pair Trading with Davis Select and OShares Europe
The main advantage of trading using opposite Davis Select and OShares Europe positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Davis Select position performs unexpectedly, OShares Europe 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 OShares Europe will offset losses from the drop in OShares Europe's long position.
The idea behind Davis Select International and OShares Europe Quality 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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