Correlation Between Schwab Broad and First Trust

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

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

Diversification Opportunities for Schwab Broad and First Trust

0.92

Correlation Coefficient

Schwab Broad  First Trust

Almost no diversification

The 3 months correlation between Schwab and First is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Broad Market 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 Schwab Broad 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 Schwab Broad Market 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 Schwab Broad i.e., Schwab Broad and First Trust go up and down completely randomly.

Pair Corralation between Schwab Broad and First Trust

Given the investment horizon of 90 days Schwab Broad Market is expected to under-perform the First Trust. In addition to that, Schwab Broad is 8.06 times more volatile than First Trust Exchange Traded. It trades about -0.1 of its total potential returns per unit of risk. First Trust Exchange Traded is currently generating about 0.32 per unit of volatility. If you would invest  4,450  in First Trust Exchange Traded on September 22, 2024 and sell it today you would earn a total of  32.00  from holding First Trust Exchange Traded or generate 0.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.45%
Values	Daily Returns

Schwab Broad Market  vs.  First Trust Exchange Traded

Schwab Broad Market

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Broad Market are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong technical indicators, Schwab Broad is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

First Trust Exchange

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Schwab Broad and First Trust

The main advantage of trading using opposite Schwab Broad and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Schwab Broad 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 Schwab Broad Market 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.