Correlation Between Matthews China and First Trust

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

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

Diversification Opportunities for Matthews China and First Trust

0.52

Correlation Coefficient

Matthews China  First Trust

Very weak diversification

The 3 months correlation between Matthews and First is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Matthews China Discovery and First Trust Exchange Traded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Exchange and Matthews China 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 Matthews China Discovery 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 Exchange has no effect on the direction of Matthews China i.e., Matthews China and First Trust go up and down completely randomly.

Pair Corralation between Matthews China and First Trust

Given the investment horizon of 90 days Matthews China Discovery is expected to generate 12.62 times more return on investment than First Trust. However, Matthews China is 12.62 times more volatile than First Trust Exchange Traded. It trades about 0.08 of its potential returns per unit of risk. First Trust Exchange Traded is currently generating about 0.24 per unit of risk. If you would invest  2,379  in Matthews China Discovery on September 3, 2024 and sell it today you would earn a total of  318.00  from holding Matthews China Discovery or generate 13.37% return on investment over 90 days.

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

Matthews China Discovery  vs.  First Trust Exchange Traded

Matthews China Discovery

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Matthews China Discovery are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile technical indicators, Matthews China unveiled solid returns over the last few months and may actually be approaching a breakup point.

First Trust Exchange

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, First Trust is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Matthews China and First Trust

The main advantage of trading using opposite Matthews China and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Matthews China 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 Matthews China Discovery and First Trust Exchange Traded 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.