Correlation Between NATO and First Trust

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

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

Diversification Opportunities for NATO and First Trust

0.46

Correlation Coefficient

NATO  First Trust

Very weak diversification

The 3 months correlation between NATO and First is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding NATO and First Trust Indxx in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Indxx and NATO 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 NATO 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 Indxx has no effect on the direction of NATO i.e., NATO and First Trust go up and down completely randomly.

Pair Corralation between NATO and First Trust

Given the investment horizon of 90 days NATO is expected to generate 0.89 times more return on investment than First Trust. However, NATO is 1.12 times less risky than First Trust. It trades about -0.14 of its potential returns per unit of risk. First Trust Indxx is currently generating about -0.17 per unit of risk. If you would invest  2,641  in NATO on September 22, 2024 and sell it today you would lose (78.00) from holding NATO or give up 2.95% of portfolio value over 90 days.

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

NATO  vs.  First Trust Indxx

NATO

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NATO are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, NATO is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

First Trust Indxx

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust Indxx has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, First Trust is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with NATO and First Trust

The main advantage of trading using opposite NATO and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NATO 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 NATO and First Trust Indxx 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.