Correlation Between First Trust and Schwab Large

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

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

Diversification Opportunities for First Trust and Schwab Large

0.88

Correlation Coefficient

First Trust  Schwab Large

Very poor diversification

The 3 months correlation between First and Schwab is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding First Trust SkyBridge and Schwab Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Large Cap 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 SkyBridge are associated (or correlated) with Schwab Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Large Cap has no effect on the direction of First Trust i.e., First Trust and Schwab Large go up and down completely randomly.

Pair Corralation between First Trust and Schwab Large

Given the investment horizon of 90 days First Trust SkyBridge is expected to generate 8.2 times more return on investment than Schwab Large. However, First Trust is 8.2 times more volatile than Schwab Large Cap Value. It trades about 0.23 of its potential returns per unit of risk. Schwab Large Cap Value is currently generating about 0.21 per unit of risk. If you would invest  1,056  in First Trust SkyBridge on September 3, 2024 and sell it today you would earn a total of  1,014  from holding First Trust SkyBridge or generate 96.02% return on investment over 90 days.

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

First Trust SkyBridge  vs.  Schwab Large Cap Value

First Trust SkyBridge

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust SkyBridge are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, First Trust unveiled solid returns over the last few months and may actually be approaching a breakup point.

Schwab Large Cap

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Large Cap Value are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile technical indicators, Schwab Large may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with First Trust and Schwab Large

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

The idea behind First Trust SkyBridge and Schwab Large Cap Value 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.