Correlation Between Litman Gregory and First Trust

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

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

Diversification Opportunities for Litman Gregory and First Trust

0.08

Correlation Coefficient

Litman Gregory  First Trust

Significant diversification

The 3 months correlation between Litman and First is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Litman Gregory Funds and First Trust Dorsey in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Dorsey and Litman Gregory 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 Litman Gregory Funds 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 Dorsey has no effect on the direction of Litman Gregory i.e., Litman Gregory and First Trust go up and down completely randomly.

Pair Corralation between Litman Gregory and First Trust

Given the investment horizon of 90 days Litman Gregory is expected to generate 3.91 times less return on investment than First Trust. But when comparing it to its historical volatility, Litman Gregory Funds is 1.59 times less risky than First Trust. It trades about 0.07 of its potential returns per unit of risk. First Trust Dorsey is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  5,529  in First Trust Dorsey on September 12, 2024 and sell it today you would earn a total of  611.00  from holding First Trust Dorsey or generate 11.05% return on investment over 90 days.

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

Litman Gregory Funds  vs.  First Trust Dorsey

Litman Gregory Funds

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Litman Gregory Funds are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, Litman Gregory is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

First Trust Dorsey

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Dorsey are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Litman Gregory and First Trust

The main advantage of trading using opposite Litman Gregory and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Litman Gregory 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 Litman Gregory Funds and First Trust Dorsey 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.