Correlation Between First Trust and Alerian Energy
Can any of the company-specific risk be diversified away by investing in both First Trust and Alerian Energy 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 Alerian Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between First Trust Energy and Alerian Energy Infrastructure, you can compare the effects of market volatilities on First Trust and Alerian Energy 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 Alerian Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Alerian Energy.
Diversification Opportunities for First Trust and Alerian Energy
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between First and Alerian is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Energy and Alerian Energy Infrastructure in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alerian Energy Infra 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 Energy are associated (or correlated) with Alerian Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alerian Energy Infra has no effect on the direction of First Trust i.e., First Trust and Alerian Energy go up and down completely randomly.
Pair Corralation between First Trust and Alerian Energy
Considering the 90-day investment horizon First Trust is expected to generate 3.05 times less return on investment than Alerian Energy. In addition to that, First Trust is 1.57 times more volatile than Alerian Energy Infrastructure. It trades about 0.05 of its total potential returns per unit of risk. Alerian Energy Infrastructure is currently generating about 0.22 per unit of volatility. If you would invest 2,148 in Alerian Energy Infrastructure on September 2, 2024 and sell it today you would earn a total of 1,163 from holding Alerian Energy Infrastructure or generate 54.14% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
First Trust Energy vs. Alerian Energy Infrastructure
Performance |
| Timeline |
| First Trust Energy |
| Alerian Energy Infra |
First Trust and Alerian Energy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with First Trust and Alerian Energy
The main advantage of trading using opposite First Trust and Alerian Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust position performs unexpectedly, Alerian Energy 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 Alerian Energy will offset losses from the drop in Alerian Energy's long position.The idea behind First Trust Energy and Alerian Energy Infrastructure 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.| Alerian Energy vs. Global X MLP | Alerian Energy vs. Tortoise North American | Alerian Energy vs. First Trust North | Alerian Energy vs. Global X MLP |
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.
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