Correlation Between Absolute Core and First Trust

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

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

Diversification Opportunities for Absolute Core and First Trust

-0.28

Correlation Coefficient

Absolute Core  First Trust

Very good diversification

The 3 months correlation between Absolute and First is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding Absolute Core Strategy and First Trust Active in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Active and Absolute Core 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 Absolute Core Strategy 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 Active has no effect on the direction of Absolute Core i.e., Absolute Core and First Trust go up and down completely randomly.

Pair Corralation between Absolute Core and First Trust

Given the investment horizon of 90 days Absolute Core Strategy is expected to generate 0.55 times more return on investment than First Trust. However, Absolute Core Strategy is 1.83 times less risky than First Trust. It trades about 0.21 of its potential returns per unit of risk. First Trust Active is currently generating about -0.05 per unit of risk. If you would invest  3,152  in Absolute Core Strategy on December 21, 2024 and sell it today you would earn a total of  228.00  from holding Absolute Core Strategy or generate 7.23% return on investment over 90 days.

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

Absolute Core Strategy  vs.  First Trust Active

Absolute Core Strategy

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Absolute Core Strategy are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical and fundamental indicators, Absolute Core may actually be approaching a critical reversion point that can send shares even higher in April 2025.

First Trust Active

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust Active has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, First Trust is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Absolute Core and First Trust

The main advantage of trading using opposite Absolute Core and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Absolute Core 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 Absolute Core Strategy and First Trust Active 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.