Correlation Between Franklin Federal and Western Asset

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

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

Diversification Opportunities for Franklin Federal and Western Asset

0.8

Correlation Coefficient

Franklin Federal  Western Asset

Very poor diversification

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

Pair Corralation between Franklin Federal and Western Asset

Assuming the 90 days horizon Franklin Federal Limited Term is expected to generate 0.48 times more return on investment than Western Asset. However, Franklin Federal Limited Term is 2.09 times less risky than Western Asset. It trades about 0.1 of its potential returns per unit of risk. Western Asset California is currently generating about -0.03 per unit of risk. If you would invest  1,020  in Franklin Federal Limited Term on December 30, 2024 and sell it today you would earn a total of  7.00  from holding Franklin Federal Limited Term or generate 0.69% return on investment over 90 days.

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

Franklin Federal Limited Term  vs.  Western Asset California

Franklin Federal Lim

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Franklin Federal Limited Term are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Franklin Federal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Western Asset California

Risk-Adjusted Performance

Very Weak

Over the last 90 days Western Asset California has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Western Asset is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Franklin Federal and Western Asset

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

The idea behind Franklin Federal Limited Term and Western Asset California 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.