Correlation Between First Trust and California Water

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

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

Diversification Opportunities for First Trust and California Water

0.58

Correlation Coefficient

First Trust  California Water

Very weak diversification

The 3 months correlation between First and California is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Water and California Water Service in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California Water Service 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 Water are associated (or correlated) with California Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California Water Service has no effect on the direction of First Trust i.e., First Trust and California Water go up and down completely randomly.

Pair Corralation between First Trust and California Water

Considering the 90-day investment horizon First Trust Water is expected to generate 0.81 times more return on investment than California Water. However, First Trust Water is 1.23 times less risky than California Water. It trades about -0.36 of its potential returns per unit of risk. California Water Service is currently generating about -0.43 per unit of risk. If you would invest  11,012  in First Trust Water on October 1, 2024 and sell it today you would lose (742.00) from holding First Trust Water or give up 6.74% of portfolio value over 90 days.

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

First Trust Water  vs.  California Water Service

First Trust Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust Water has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable forward indicators, First Trust is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

California Water Service

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days California Water Service has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with First Trust and California Water

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

The idea behind First Trust Water and California Water Service 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 Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.