Correlation Between Davis Select and Verizon Communications

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

By analyzing existing cross correlation between Davis Select Financial and Verizon Communications, you can compare the effects of market volatilities on Davis Select and Verizon Communications 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 Verizon Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Davis Select and Verizon Communications.

Diversification Opportunities for Davis Select and Verizon Communications

0.71

Correlation Coefficient

Davis Select  Verizon Communications

Poor diversification

The 3 months correlation between Davis and Verizon is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Davis Select Financial and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 Financial are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Davis Select i.e., Davis Select and Verizon Communications go up and down completely randomly.

Pair Corralation between Davis Select and Verizon Communications

Given the investment horizon of 90 days Davis Select Financial is expected to generate 1.4 times more return on investment than Verizon Communications. However, Davis Select is 1.4 times more volatile than Verizon Communications. It trades about 0.24 of its potential returns per unit of risk. Verizon Communications is currently generating about 0.06 per unit of risk. If you would invest  3,675  in Davis Select Financial on July 22, 2024 and sell it today you would earn a total of  167.00  from holding Davis Select Financial or generate 4.54% return on investment over 90 days.

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

Davis Select Financial  vs.  Verizon Communications

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 November 2024.

Verizon Communications

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, Verizon Communications showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Davis Select and Verizon Communications

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

The idea behind Davis Select Financial and Verizon Communications 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.