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 RBA 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

First Trust  Financial Select

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 RBA 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 RBA 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

Given the investment horizon of 90 days First Trust RBA is expected to under-perform the Financial Select. In addition to that, First Trust is 1.69 times more volatile than Financial Select Sector. It trades about -0.11 of its total potential returns per unit of risk. Financial Select Sector is currently generating about -0.15 per unit of volatility. If you would invest  4,189  in Financial Select Sector on January 30, 2024 and sell it today you would lose (107.99) from holding Financial Select Sector or give up 2.58% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.45%
Values	Daily Returns

First Trust RBA  vs.  Financial Select Sector

First Trust RBA

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust RBA are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, First Trust reported solid returns over the last few months and may actually be approaching a breakup point.

Financial Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

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 RBA 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.

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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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..