Correlation Between Davis Financial and Smallcap World

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

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

Diversification Opportunities for Davis Financial and Smallcap World

0.96

Correlation Coefficient

Davis Financial  Smallcap World

Almost no diversification

The 3 months correlation between Davis and Smallcap is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Davis Financial Fund and Smallcap World Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap World and Davis 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 Davis Financial Fund are associated (or correlated) with Smallcap World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap World has no effect on the direction of Davis Financial i.e., Davis Financial and Smallcap World go up and down completely randomly.

Pair Corralation between Davis Financial and Smallcap World

Assuming the 90 days horizon Davis Financial is expected to generate 1.29 times less return on investment than Smallcap World. In addition to that, Davis Financial is 1.14 times more volatile than Smallcap World Fund. It trades about 0.12 of its total potential returns per unit of risk. Smallcap World Fund is currently generating about 0.17 per unit of volatility. If you would invest  6,744  in Smallcap World Fund on May 16, 2025 and sell it today you would earn a total of  542.00  from holding Smallcap World Fund or generate 8.04% return on investment over 90 days.

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

Davis Financial Fund  vs.  Smallcap World Fund

Davis Financial

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Financial Fund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Davis Financial may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Smallcap World

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap World may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Davis Financial and Smallcap World

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

The idea behind Davis Financial Fund and Smallcap World Fund 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.