Correlation Between PIMCO RAFI and First Trust

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

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

Diversification Opportunities for PIMCO RAFI and First Trust

-0.7

Correlation Coefficient

PIMCO RAFI  First Trust

Excellent diversification

The 3 months correlation between PIMCO and First is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding PIMCO RAFI Dynamic and First Trust Large in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Large and PIMCO RAFI 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 PIMCO RAFI Dynamic 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 Large has no effect on the direction of PIMCO RAFI i.e., PIMCO RAFI and First Trust go up and down completely randomly.

Pair Corralation between PIMCO RAFI and First Trust

Given the investment horizon of 90 days PIMCO RAFI is expected to generate 1.96 times less return on investment than First Trust. But when comparing it to its historical volatility, PIMCO RAFI Dynamic is 1.26 times less risky than First Trust. It trades about 0.06 of its potential returns per unit of risk. First Trust Large is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  9,166  in First Trust Large on September 16, 2024 and sell it today you would earn a total of  5,309  from holding First Trust Large or generate 57.92% return on investment over 90 days.

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

PIMCO RAFI Dynamic  vs.  First Trust Large

PIMCO RAFI Dynamic

Risk-Adjusted Performance

0 of 100

Very Weak

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

First Trust Large

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Large are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with PIMCO RAFI and First Trust

The main advantage of trading using opposite PIMCO RAFI and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PIMCO RAFI 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 PIMCO RAFI Dynamic and First Trust Large 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.