Correlation Between Algonquin Power and First Trust

Can any of the company-specific risk be diversified away by investing in both Algonquin Power 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 Algonquin Power and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Algonquin Power Utilities and First Trust Japan, you can compare the effects of market volatilities on Algonquin Power 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 Algonquin Power with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Algonquin Power and First Trust.

Diversification Opportunities for Algonquin Power and First Trust

0.59

Correlation Coefficient

Algonquin Power  First Trust

Very weak diversification

The 3 months correlation between Algonquin and First is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Algonquin Power Utilities and First Trust Japan in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Japan and Algonquin Power 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 Algonquin Power Utilities 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 Japan has no effect on the direction of Algonquin Power i.e., Algonquin Power and First Trust go up and down completely randomly.

Pair Corralation between Algonquin Power and First Trust

Assuming the 90 days trading horizon Algonquin Power Utilities is expected to under-perform the First Trust. In addition to that, Algonquin Power is 1.68 times more volatile than First Trust Japan. It trades about -0.06 of its total potential returns per unit of risk. First Trust Japan is currently generating about 0.04 per unit of volatility. If you would invest  4,190  in First Trust Japan on January 19, 2024 and sell it today you would earn a total of  1,045  from holding First Trust Japan or generate 24.94% return on investment over 90 days.

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

Algonquin Power Utilities  vs.  First Trust Japan

Algonquin Power Utilities

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Algonquin Power Utilities are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Algonquin Power is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

First Trust Japan

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Japan are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable forward-looking indicators, First Trust is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Algonquin Power and First Trust

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

The idea behind Algonquin Power Utilities and First Trust Japan 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.