Correlation Between Western Asset and First Trust

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

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

Diversification Opportunities for Western Asset and First Trust

0.96

Correlation Coefficient

Western Asset  First Trust

Almost no diversification

The 3 months correlation between Western and First is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Short and First Trust Low in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Low and Western Asset 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 Western Asset Short 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 Low has no effect on the direction of Western Asset i.e., Western Asset and First Trust go up and down completely randomly.

Pair Corralation between Western Asset and First Trust

Given the investment horizon of 90 days Western Asset Short is expected to generate 0.76 times more return on investment than First Trust. However, Western Asset Short is 1.31 times less risky than First Trust. It trades about 0.25 of its potential returns per unit of risk. First Trust Low is currently generating about 0.18 per unit of risk. If you would invest  2,376  in Western Asset Short on December 28, 2024 and sell it today you would earn a total of  40.00  from holding Western Asset Short or generate 1.68% return on investment over 90 days.

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

Western Asset Short  vs.  First Trust Low

Western Asset Short

Risk-Adjusted Performance

Solid

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

First Trust Low

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Low are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, First Trust is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Western Asset and First Trust

The main advantage of trading using opposite Western Asset and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Asset 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 Western Asset Short and First Trust Low 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 Transaction History module to view history of all your transactions and understand their impact on performance.