Correlation Between First Trust and Smith Nephew

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

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

Diversification Opportunities for First Trust and Smith Nephew

-0.72

Correlation Coefficient

First Trust  Smith Nephew

Pay attention - limited upside

The 3 months correlation between First and Smith is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Consumer and Smith Nephew SNATS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith Nephew SNATS 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 Consumer are associated (or correlated) with Smith Nephew. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith Nephew SNATS has no effect on the direction of First Trust i.e., First Trust and Smith Nephew go up and down completely randomly.

Pair Corralation between First Trust and Smith Nephew

Considering the 90-day investment horizon First Trust Consumer is expected to generate 0.4 times more return on investment than Smith Nephew. However, First Trust Consumer is 2.51 times less risky than Smith Nephew. It trades about 0.19 of its potential returns per unit of risk. Smith Nephew SNATS is currently generating about -0.13 per unit of risk. If you would invest  6,135  in First Trust Consumer on September 13, 2024 and sell it today you would earn a total of  652.00  from holding First Trust Consumer or generate 10.63% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.44%
Values	Daily Returns

First Trust Consumer  vs.  Smith Nephew SNATS

First Trust Consumer

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Consumer are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Smith Nephew SNATS

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smith Nephew SNATS has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with First Trust and Smith Nephew

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

The idea behind First Trust Consumer and Smith Nephew SNATS 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.