Correlation Between First Trust and NATO

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

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

Diversification Opportunities for First Trust and NATO

-0.16

Correlation Coefficient

First Trust  NATO

Good diversification

The 3 months correlation between First and NATO is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Indxx and NATO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NATO 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 Indxx are associated (or correlated) with NATO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NATO has no effect on the direction of First Trust i.e., First Trust and NATO go up and down completely randomly.

Pair Corralation between First Trust and NATO

Given the investment horizon of 90 days First Trust is expected to generate 2.2 times less return on investment than NATO. But when comparing it to its historical volatility, First Trust Indxx is 1.05 times less risky than NATO. It trades about 0.06 of its potential returns per unit of risk. NATO is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  2,539  in NATO on September 5, 2024 and sell it today you would earn a total of  139.00  from holding NATO or generate 5.47% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	59.38%
Values	Daily Returns

First Trust Indxx  vs.  NATO

First Trust Indxx

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Indxx are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, First Trust is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

NATO

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in NATO are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, NATO may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with First Trust and NATO

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

The idea behind First Trust Indxx and NATO 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.