Correlation Between International Business and First Trust

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

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

Diversification Opportunities for International Business and First Trust

0.38

Correlation Coefficient

International Business  First Trust

Weak diversification

The 3 months correlation between International and First is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding International Business Machine and First Trust Active in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Active and International Business 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 International Business Machines 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 Active has no effect on the direction of International Business i.e., International Business and First Trust go up and down completely randomly.

Pair Corralation between International Business and First Trust

Considering the 90-day investment horizon International Business Machines is expected to under-perform the First Trust. In addition to that, International Business is 1.62 times more volatile than First Trust Active. It trades about -0.18 of its total potential returns per unit of risk. First Trust Active is currently generating about -0.22 per unit of volatility. If you would invest  3,628  in First Trust Active on October 6, 2024 and sell it today you would lose (139.00) from holding First Trust Active or give up 3.83% of portfolio value over 90 days.

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

International Business Machine  vs.  First Trust Active

International Business

Risk-Adjusted Performance

0 of 100

Very Weak

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

First Trust Active

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Active are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable essential indicators, First Trust is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with International Business and First Trust

The main advantage of trading using opposite International Business and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Business 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 International Business Machines and First Trust Active 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.