Correlation Between Fairfax Financial and Allstate

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

Diversification Opportunities for Fairfax Financial and Allstate

0.79

Correlation Coefficient

Fairfax Financial  Allstate

Poor diversification

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

Pair Corralation between Fairfax Financial and Allstate

Assuming the 90 days horizon Fairfax Financial Holdings is expected to generate 1.93 times more return on investment than Allstate. However, Fairfax Financial is 1.93 times more volatile than The Allstate. It trades about 0.15 of its potential returns per unit of risk. The Allstate is currently generating about 0.22 per unit of risk. If you would invest  79,095  in Fairfax Financial Holdings on January 18, 2024 and sell it today you would earn a total of  21,540  from holding Fairfax Financial Holdings or generate 27.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	68.29%
Values	Daily Returns

Fairfax Financial Holdings  vs.  The Allstate

Fairfax Financial

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Fairfax Financial Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly inconsistent technical indicators, Fairfax Financial reported solid returns over the last few months and may actually be approaching a breakup point.

Allstate

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Allstate are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite inconsistent essential indicators, Allstate may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Fairfax Financial and Allstate

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

The idea behind Fairfax Financial Holdings and The Allstate 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.