Correlation Between CHIM and First Trust

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

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

Diversification Opportunities for CHIM and First Trust

-0.2

Correlation Coefficient

CHIM  First Trust

Good diversification

The 3 months correlation between CHIM and First is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding CHIM and First Trust China in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust China and CHIM 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 CHIM 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 China has no effect on the direction of CHIM i.e., CHIM and First Trust go up and down completely randomly.

Pair Corralation between CHIM and First Trust

Given the investment horizon of 90 days CHIM is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, CHIM is 1.51 times less risky than First Trust. The etf trades about -0.02 of its potential returns per unit of risk. The First Trust China is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,937  in First Trust China on September 19, 2024 and sell it today you would earn a total of  71.00  from holding First Trust China or generate 3.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	28.92%
Values	Daily Returns

CHIM  vs.  First Trust China

CHIM

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CHIM has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, CHIM is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

First Trust China

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust China are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, First Trust sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CHIM and First Trust

The main advantage of trading using opposite CHIM and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CHIM 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 CHIM and First Trust China 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.