Correlation Between First Trust and Schwab Fundamental

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

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

Diversification Opportunities for First Trust and Schwab Fundamental

0.84

Correlation Coefficient

First Trust  Schwab Fundamental

Very poor diversification

The 3 months correlation between First and Schwab is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Active and Schwab Fundamental Broad in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Fundamental Broad and First Trust 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 First Trust Active are associated (or correlated) with Schwab Fundamental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Fundamental Broad has no effect on the direction of First Trust i.e., First Trust and Schwab Fundamental go up and down completely randomly.

Pair Corralation between First Trust and Schwab Fundamental

Given the investment horizon of 90 days First Trust Active is expected to under-perform the Schwab Fundamental. In addition to that, First Trust is 1.3 times more volatile than Schwab Fundamental Broad. It trades about -0.04 of its total potential returns per unit of risk. Schwab Fundamental Broad is currently generating about 0.0 per unit of volatility. If you would invest  2,331  in Schwab Fundamental Broad on December 20, 2024 and sell it today you would lose (5.00) from holding Schwab Fundamental Broad or give up 0.21% of portfolio value over 90 days.

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

First Trust Active  vs.  Schwab Fundamental Broad

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.

Schwab Fundamental Broad

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab Fundamental Broad has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, Schwab Fundamental is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with First Trust and Schwab Fundamental

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

The idea behind First Trust Active and Schwab Fundamental Broad 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 Transaction History module to view history of all your transactions and understand their impact on performance.