Correlation Between Western Asset and First Trust

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

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

Diversification Opportunities for Western Asset and First Trust

0.23

Correlation Coefficient

Western Asset  First Trust

Modest diversification

The 3 months correlation between Western and First is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Emerging and First Trust Specialty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Specialty and Western Asset 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 Western Asset Emerging 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 Specialty has no effect on the direction of Western Asset i.e., Western Asset and First Trust go up and down completely randomly.

Pair Corralation between Western Asset and First Trust

Considering the 90-day investment horizon Western Asset is expected to generate 2.01 times less return on investment than First Trust. But when comparing it to its historical volatility, Western Asset Emerging is 1.51 times less risky than First Trust. It trades about 0.1 of its potential returns per unit of risk. First Trust Specialty is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  304.00  in First Trust Specialty on October 5, 2024 and sell it today you would earn a total of  126.00  from holding First Trust Specialty or generate 41.45% return on investment over 90 days.

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

Western Asset Emerging  vs.  First Trust Specialty

Western Asset Emerging

Risk-Adjusted Performance

0 of 100

Very Weak

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

First Trust Specialty

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Specialty are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. Despite somewhat unsteady technical and fundamental indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Western Asset and First Trust

The main advantage of trading using opposite Western Asset and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Asset 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 Western Asset Emerging and First Trust Specialty 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.