Correlation Between Bank of America and First Trust

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

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

Diversification Opportunities for Bank of America and First Trust

0.38

Correlation Coefficient

Bank of America  First Trust

Weak diversification

The 3 months correlation between Bank and First is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and First Trust Cboe in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Cboe and Bank of America 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 Bank of America 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 Cboe has no effect on the direction of Bank of America i.e., Bank of America and First Trust go up and down completely randomly.

Pair Corralation between Bank of America and First Trust

Considering the 90-day investment horizon Bank of America is expected to under-perform the First Trust. In addition to that, Bank of America is 2.91 times more volatile than First Trust Cboe. It trades about -0.1 of its total potential returns per unit of risk. First Trust Cboe is currently generating about 0.03 per unit of volatility. If you would invest  3,068  in First Trust Cboe on November 28, 2024 and sell it today you would earn a total of  17.00  from holding First Trust Cboe or generate 0.55% return on investment over 90 days.

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

Bank of America  vs.  First Trust Cboe

Bank of America

Risk-Adjusted Performance

Very Weak

Over the last 90 days Bank of America has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

First Trust Cboe

Risk-Adjusted Performance

Weak

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

Pair Trading with Bank of America and First Trust

The main advantage of trading using opposite Bank of America and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bank of America 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 Bank of America and First Trust Cboe 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.