Correlation Between Financial Industries and First Trust
Can any of the company-specific risk be diversified away by investing in both Financial Industries 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 Financial Industries and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Financial Industries Fund and First Trust Specialty, you can compare the effects of market volatilities on Financial Industries 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 Financial Industries with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Industries and First Trust.
Diversification Opportunities for Financial Industries and First Trust
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Financial and First is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and First Trust Specialty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Specialty and Financial Industries 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 Financial Industries Fund 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 Specialty has no effect on the direction of Financial Industries i.e., Financial Industries and First Trust go up and down completely randomly.
Pair Corralation between Financial Industries and First Trust
Assuming the 90 days horizon Financial Industries Fund is expected to generate 2.71 times more return on investment than First Trust. However, Financial Industries is 2.71 times more volatile than First Trust Specialty. It trades about 0.29 of its potential returns per unit of risk. First Trust Specialty is currently generating about 0.47 per unit of risk. If you would invest 1,900 in Financial Industries Fund on September 1, 2024 and sell it today you would earn a total of 228.00 from holding Financial Industries Fund or generate 12.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.45% |
| Values | Daily Returns |
Financial Industries Fund vs. First Trust Specialty
Performance |
| Timeline |
| Financial Industries |
| First Trust Specialty |
Financial Industries and First Trust Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Financial Industries and First Trust
The main advantage of trading using opposite Financial Industries and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Industries 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 Financial Industries Fund and First Trust Specialty 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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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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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