Correlation Between First Trust and Overlay Shares
Can any of the company-specific risk be diversified away by investing in both First Trust and Overlay Shares 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 Overlay Shares into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between First Trust Short and Overlay Shares Core, you can compare the effects of market volatilities on First Trust and Overlay Shares 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 Overlay Shares. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Overlay Shares.
Diversification Opportunities for First Trust and Overlay Shares
0.52 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between First and Overlay is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Short and Overlay Shares Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Overlay Shares Core 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 Short are associated (or correlated) with Overlay Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Overlay Shares Core has no effect on the direction of First Trust i.e., First Trust and Overlay Shares go up and down completely randomly.
Pair Corralation between First Trust and Overlay Shares
Given the investment horizon of 90 days First Trust Short is expected to generate 0.45 times more return on investment than Overlay Shares. However, First Trust Short is 2.24 times less risky than Overlay Shares. It trades about 0.03 of its potential returns per unit of risk. Overlay Shares Core is currently generating about -0.03 per unit of risk. If you would invest 1,990 in First Trust Short on August 27, 2024 and sell it today you would earn a total of 2.00 from holding First Trust Short or generate 0.1% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
First Trust Short vs. Overlay Shares Core
Performance |
| Timeline |
| First Trust Short |
| Overlay Shares Core |
First Trust and Overlay Shares Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with First Trust and Overlay Shares
The main advantage of trading using opposite First Trust and Overlay Shares positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust position performs unexpectedly, Overlay Shares 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 Overlay Shares will offset losses from the drop in Overlay Shares' long position.| First Trust vs. First Trust Ultra | First Trust vs. First Trust Municipal | First Trust vs. First Trust Managed | First Trust vs. First Trust Institutional |
| Overlay Shares vs. iShares MSCI EAFE | Overlay Shares vs. iShares iBoxx Investment | Overlay Shares vs. iShares TIPS Bond | Overlay Shares vs. iShares 1 3 Year |
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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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