Correlation Between 3M and First Trust

Can any of the company-specific risk be diversified away by investing in both 3M 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 3M and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 3M Company and First Trust Mid, you can compare the effects of market volatilities on 3M 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 3M with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of 3M and First Trust.

Diversification Opportunities for 3M and First Trust

0.54

Correlation Coefficient

3M  First Trust

Very weak diversification

The 3 months correlation between 3M and First is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding 3M Company and First Trust Mid in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Mid and 3M 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 3M Company 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 Mid has no effect on the direction of 3M i.e., 3M and First Trust go up and down completely randomly.

Pair Corralation between 3M and First Trust

Considering the 90-day investment horizon 3M Company is expected to generate 1.7 times more return on investment than First Trust. However, 3M is 1.7 times more volatile than First Trust Mid. It trades about 0.42 of its potential returns per unit of risk. First Trust Mid is currently generating about 0.29 per unit of risk. If you would invest  9,262  in 3M Company on February 21, 2024 and sell it today you would earn a total of  1,259  from holding 3M Company or generate 13.59% return on investment over 90 days.

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

3M Company  vs.  First Trust Mid

3M Company

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in 3M Company are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, 3M displayed solid returns over the last few months and may actually be approaching a breakup point.

First Trust Mid

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Mid are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with 3M and First Trust

The main advantage of trading using opposite 3M and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 3M 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 3M Company and First Trust Mid 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.