Correlation Between First Trust and CHIX

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

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

Diversification Opportunities for First Trust and CHIX

0.3

Correlation Coefficient

First Trust  CHIX

Weak diversification

The 3 months correlation between First and CHIX is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding First Trust China and CHIX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CHIX 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 China are associated (or correlated) with CHIX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CHIX has no effect on the direction of First Trust i.e., First Trust and CHIX go up and down completely randomly.

Pair Corralation between First Trust and CHIX

Considering the 90-day investment horizon First Trust China is expected to generate 1.88 times more return on investment than CHIX. However, First Trust is 1.88 times more volatile than CHIX. It trades about 0.02 of its potential returns per unit of risk. CHIX is currently generating about -0.05 per unit of risk. If you would invest  1,823  in First Trust China on September 19, 2024 and sell it today you would earn a total of  185.00  from holding First Trust China or generate 10.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	10.05%
Values	Daily Returns

First Trust China  vs.  CHIX

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.

CHIX

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with First Trust and CHIX

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

The idea behind First Trust China and CHIX 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.