Correlation Between Innovator and First Trust
Can any of the company-specific risk be diversified away by investing in both Innovator 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 Innovator and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Innovator SP 500 and First Trust Cboe, you can compare the effects of market volatilities on Innovator 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 Innovator with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Innovator and First Trust.
Diversification Opportunities for Innovator and First Trust
1.0 | Correlation Coefficient |
No risk reduction
The 3 months correlation between Innovator and First is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Innovator SP 500 and First Trust Cboe in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Cboe and Innovator 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 Innovator SP 500 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 Cboe has no effect on the direction of Innovator i.e., Innovator and First Trust go up and down completely randomly.
Pair Corralation between Innovator and First Trust
Given the investment horizon of 90 days Innovator SP 500 is expected to generate 1.01 times more return on investment than First Trust. However, Innovator is 1.01 times more volatile than First Trust Cboe. It trades about 0.15 of its potential returns per unit of risk. First Trust Cboe is currently generating about 0.14 per unit of risk. If you would invest 3,319 in Innovator SP 500 on September 5, 2024 and sell it today you would earn a total of 264.00 from holding Innovator SP 500 or generate 7.95% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Innovator SP 500 vs. First Trust Cboe
Performance |
| Timeline |
| Innovator SP 500 |
| First Trust Cboe |
Innovator and First Trust Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Innovator and First Trust
The main advantage of trading using opposite Innovator and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Innovator 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 Innovator SP 500 and First Trust Cboe 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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