Correlation Between Royce Value and First Trust

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

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

Diversification Opportunities for Royce Value and First Trust

0.24

Correlation Coefficient

Royce Value  First Trust

Modest diversification

The 3 months correlation between Royce and First is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Royce Value Closed and First Trust Specialty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Specialty and Royce Value 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 Royce Value Closed 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 Specialty has no effect on the direction of Royce Value i.e., Royce Value and First Trust go up and down completely randomly.

Pair Corralation between Royce Value and First Trust

Considering the 90-day investment horizon Royce Value Closed is expected to under-perform the First Trust. But the stock apears to be less risky and, when comparing its historical volatility, Royce Value Closed is 1.12 times less risky than First Trust. The stock trades about -0.1 of its potential returns per unit of risk. The First Trust Specialty is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  422.00  in First Trust Specialty on December 27, 2024 and sell it today you would earn a total of  9.00  from holding First Trust Specialty or generate 2.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Royce Value Closed  vs.  First Trust Specialty

Royce Value Closed

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Value Closed has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Royce Value is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

First Trust Specialty

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Specialty are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. Despite somewhat strong technical and fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Royce Value and First Trust

The main advantage of trading using opposite Royce Value and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Royce Value 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 Royce Value Closed and First Trust Specialty 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.