Correlation Between First Trust and China Fund

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

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

Diversification Opportunities for First Trust and China Fund

0.8

Correlation Coefficient

First Trust  China Fund

Very poor diversification

The 3 months correlation between First and China is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Mortgage and China Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Fund 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 Mortgage are associated (or correlated) with China Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Fund has no effect on the direction of First Trust i.e., First Trust and China Fund go up and down completely randomly.

Pair Corralation between First Trust and China Fund

Considering the 90-day investment horizon First Trust is expected to generate 2.46 times less return on investment than China Fund. But when comparing it to its historical volatility, First Trust Mortgage is 2.41 times less risky than China Fund. It trades about 0.07 of its potential returns per unit of risk. China Fund is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,224  in China Fund on December 26, 2024 and sell it today you would earn a total of  81.00  from holding China Fund or generate 6.62% return on investment over 90 days.

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

First Trust Mortgage  vs.  China Fund

First Trust Mortgage

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Mortgage are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary indicators, First Trust is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

China Fund

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of very fragile technical indicators, China Fund may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with First Trust and China Fund

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

The idea behind First Trust Mortgage and China Fund 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.