Correlation Between DTF Tax and First Trust

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

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

Diversification Opportunities for DTF Tax and First Trust

0.79

Correlation Coefficient

DTF Tax  First Trust

Poor diversification

The 3 months correlation between DTF and First is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding DTF Tax Free and First Trust High in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust High and DTF Tax 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 DTF Tax Free 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 High has no effect on the direction of DTF Tax i.e., DTF Tax and First Trust go up and down completely randomly.

Pair Corralation between DTF Tax and First Trust

Considering the 90-day investment horizon DTF Tax Free is expected to under-perform the First Trust. But the stock apears to be less risky and, when comparing its historical volatility, DTF Tax Free is 2.7 times less risky than First Trust. The stock trades about -0.02 of its potential returns per unit of risk. The First Trust High is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,429  in First Trust High on February 3, 2025 and sell it today you would lose (9.00) from holding First Trust High or give up 0.63% of portfolio value over 90 days.

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

DTF Tax Free  vs.  First Trust High

DTF Tax Free

Risk-Adjusted Performance

Very Weak

Over the last 90 days DTF Tax Free has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, DTF Tax is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

First Trust High

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust High has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical indicators, First Trust is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with DTF Tax and First Trust

The main advantage of trading using opposite DTF Tax and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DTF Tax 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 DTF Tax Free and First Trust High 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.