Correlation Between Principal Quality and First Trust

Can any of the company-specific risk be diversified away by investing in both Principal Quality 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 Principal Quality and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Principal Quality ETF and First Trust Developed, you can compare the effects of market volatilities on Principal Quality 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 Principal Quality with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal Quality and First Trust.

Diversification Opportunities for Principal Quality and First Trust

0.9

Correlation Coefficient

Principal Quality  First Trust

Almost no diversification

The 3 months correlation between Principal and First is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Principal Quality ETF and First Trust Developed in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Developed and Principal Quality 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 Principal Quality ETF 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 Developed has no effect on the direction of Principal Quality i.e., Principal Quality and First Trust go up and down completely randomly.

Pair Corralation between Principal Quality and First Trust

Given the investment horizon of 90 days Principal Quality is expected to generate 2.5 times less return on investment than First Trust. But when comparing it to its historical volatility, Principal Quality ETF is 1.14 times less risky than First Trust. It trades about 0.15 of its potential returns per unit of risk. First Trust Developed is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  4,513  in First Trust Developed on May 12, 2025 and sell it today you would earn a total of  809.00  from holding First Trust Developed or generate 17.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Principal Quality ETF  vs.  First Trust Developed

Principal Quality ETF

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Quality ETF are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Principal Quality may actually be approaching a critical reversion point that can send shares even higher in September 2025.

First Trust Developed

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Developed are ranked lower than 25 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, First Trust unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Principal Quality and First Trust

The main advantage of trading using opposite Principal Quality and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Principal Quality 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 Principal Quality ETF and First Trust Developed 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..