Can any of the company-specific risk be diversified away by investing in both MORE 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 MORE and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between MORE and First Trust Multi Asset, you can compare the effects of market volatilities on MORE 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 MORE with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of MORE and First Trust.
Diversification Opportunities for MORE and First Trust
The 3 months correlation between MORE and First is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding MORE and First Trust Multi-Asset in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Multi-Asset and MORE 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 MORE 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 Multi-Asset has no effect on the direction of MORE i.e., MORE and First Trust go up and down completely randomly.
Given the investment horizon of 90 days MORE is expected to under-perform the First Trust. In addition to that, MORE is 1.37 times more volatile than First Trust Multi Asset. It trades about -0.03 of its total potential returns per unit of risk. First Trust Multi Asset is currently generating about 0.04 per unit of volatility. If you would invest 1,433 in First Trust Multi Asset on September 7, 2023 and sell it today you would earn a total of 94.00 from holding First Trust Multi Asset or generate 6.56% return on investment over 90 days.
Over the last 90 days MORE has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, MORE is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.
Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Multi Asset are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable forward indicators, First Trust is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.
The main advantage of trading using opposite MORE and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MORE 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 MORE and First Trust Multi Asset 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 Stocks Directory module to find actively traded stocks across global markets.
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