Correlation Between First Trust and Financial Select
Can any of the company-specific risk be diversified away by investing in both First Trust and Financial Select 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 Financial Select into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between First Trust Financials and Financial Select Sector, you can compare the effects of market volatilities on First Trust and Financial Select 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 Financial Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Financial Select.
Diversification Opportunities for First Trust and Financial Select
0.92 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between First and Financial is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Financials and Financial Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Select Sector 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 Financials are associated (or correlated) with Financial Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Select Sector has no effect on the direction of First Trust i.e., First Trust and Financial Select go up and down completely randomly.
Pair Corralation between First Trust and Financial Select
Considering the 90-day investment horizon First Trust is expected to generate 1.25 times less return on investment than Financial Select. In addition to that, First Trust is 1.28 times more volatile than Financial Select Sector. It trades about 0.02 of its total potential returns per unit of risk. Financial Select Sector is currently generating about 0.03 per unit of volatility. If you would invest 3,393 in Financial Select Sector on January 17, 2024 and sell it today you would earn a total of 593.00 from holding Financial Select Sector or generate 17.48% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 99.8% |
| Values | Daily Returns |
First Trust Financials vs. Financial Select Sector
Performance |
| Timeline |
| First Trust Financials |
| Financial Select Sector |
First Trust and Financial Select Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with First Trust and Financial Select
The main advantage of trading using opposite First Trust and Financial Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust position performs unexpectedly, Financial Select 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 Financial Select will offset losses from the drop in Financial Select's long position.The idea behind First Trust Financials and Financial Select Sector 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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