Correlation Between Steel Dynamics and First Trust

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

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

Diversification Opportunities for Steel Dynamics and First Trust

0.32

Correlation Coefficient

Steel Dynamics  First Trust

Weak diversification

The 3 months correlation between Steel and First is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and First Trust Expanded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Expanded and Steel Dynamics 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 Steel Dynamics 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 Expanded has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and First Trust go up and down completely randomly.

Pair Corralation between Steel Dynamics and First Trust

Given the investment horizon of 90 days Steel Dynamics is expected to generate 1.51 times more return on investment than First Trust. However, Steel Dynamics is 1.51 times more volatile than First Trust Expanded. It trades about 0.08 of its potential returns per unit of risk. First Trust Expanded is currently generating about -0.09 per unit of risk. If you would invest  11,662  in Steel Dynamics on December 25, 2024 and sell it today you would earn a total of  1,004  from holding Steel Dynamics or generate 8.61% return on investment over 90 days.

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

Steel Dynamics  vs.  First Trust Expanded

Steel Dynamics

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Steel Dynamics may actually be approaching a critical reversion point that can send shares even higher in April 2025.

First Trust Expanded

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust Expanded has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the fund shareholders.

Pair Trading with Steel Dynamics and First Trust

The main advantage of trading using opposite Steel Dynamics and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Steel Dynamics 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 Steel Dynamics and First Trust Expanded 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.