Can any of the company-specific risk be diversified away by investing in both United States and First Trust 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 United States and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between United States Brent and First Trust Natural, you can compare the effects of market volatilities on United States and First Trust 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 United States with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of United States and First Trust.
Diversification Opportunities for United States and First Trust
The 3 months correlation between United and First is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding United States Brent and First Trust Natural in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Natural and United States 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 United States Brent are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Natural has no effect on the direction of United States i.e., United States and First Trust go up and down completely randomly.
Pair Corralation between United States and First Trust
Considering the 90-day investment horizon United States Brent is expected to under-perform the First Trust. In addition to that, United States is 1.11 times more volatile than First Trust Natural. It trades about -0.03 of its total potential returns per unit of risk. First Trust Natural is currently generating about 0.09 per unit of volatility. If you would invest 2,531 in First Trust Natural on March 6, 2024 and sell it today you would earn a total of 149.00 from holding First Trust Natural or generate 5.89% return on investment over 90 days.
Over the last 90 days United States Brent has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, United States is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Natural are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable fundamental indicators, First Trust is not utilizing all of its potentials. The new stock price disturbance, may contribute to mid-run losses for the stockholders.