Correlation Between Materials Select and First Trust
Can any of the company-specific risk be diversified away by investing in both Materials Select 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 Materials Select and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Materials Select Sector and First Trust Nasdaq, you can compare the effects of market volatilities on Materials Select 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 Materials Select with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Materials Select and First Trust.
Diversification Opportunities for Materials Select and First Trust
0.09 | Correlation Coefficient |
Significant diversification
The 3 months correlation between Materials and First is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and First Trust Nasdaq in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Nasdaq and Materials Select 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 Materials Select Sector 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 Nasdaq has no effect on the direction of Materials Select i.e., Materials Select and First Trust go up and down completely randomly.
Pair Corralation between Materials Select and First Trust
Considering the 90-day investment horizon Materials Select is expected to generate 1.2 times less return on investment than First Trust. In addition to that, Materials Select is 1.12 times more volatile than First Trust Nasdaq. It trades about 0.11 of its total potential returns per unit of risk. First Trust Nasdaq is currently generating about 0.15 per unit of volatility. If you would invest 2,418 in First Trust Nasdaq on September 2, 2024 and sell it today you would earn a total of 52.00 from holding First Trust Nasdaq or generate 2.15% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Materials Select Sector vs. First Trust Nasdaq
Performance |
| Timeline |
| Materials Select Sector |
| First Trust Nasdaq |
Materials Select and First Trust Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Materials Select and First Trust
The main advantage of trading using opposite Materials Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Materials Select 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.| Materials Select vs. Industrial Select Sector | Materials Select vs. Consumer Discretionary Select | Materials Select vs. Consumer Staples Select | Materials Select vs. Utilities Select Sector |
| First Trust vs. Consumer Discretionary Select | First Trust vs. Industrial Select Sector | First Trust vs. Utilities Select Sector | First Trust vs. Materials Select Sector |
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 Transaction History module to view history of all your transactions and understand their impact on performance.
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