Correlation Between Energy Select and First Trust
Can any of the company-specific risk be diversified away by investing in both Energy 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 Energy 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 Energy Select Sector and First Trust Natural, you can compare the effects of market volatilities on Energy 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 Energy Select with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Select and First Trust.
Diversification Opportunities for Energy Select and First Trust
0.93 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Energy and First is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector and First Trust Natural in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Natural and Energy 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 Energy 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 Natural has no effect on the direction of Energy Select i.e., Energy Select and First Trust go up and down completely randomly.
Pair Corralation between Energy Select and First Trust
Considering the 90-day investment horizon Energy Select is expected to generate 1.2 times less return on investment than First Trust. But when comparing it to its historical volatility, Energy Select Sector is 1.38 times less risky than First Trust. It trades about 0.33 of its potential returns per unit of risk. First Trust Natural is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest 2,358 in First Trust Natural on August 30, 2024 and sell it today you would earn a total of 235.00 from holding First Trust Natural or generate 9.97% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Energy Select Sector vs. First Trust Natural
Performance |
| Timeline |
| Energy Select Sector |
| First Trust Natural |
Energy Select and First Trust Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Energy Select and First Trust
The main advantage of trading using opposite Energy Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Energy 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.| Energy Select vs. Financial Select Sector | Energy Select vs. Health Care Select | Energy Select vs. Technology Select Sector | Energy Select vs. Utilities 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.
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