Correlation Between Principal Value and First Trust

Can any of the company-specific risk be diversified away by investing in both Principal Value 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 Value 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 Value ETF and First Trust Developed, you can compare the effects of market volatilities on Principal Value 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 Value with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal Value and First Trust.

Diversification Opportunities for Principal Value and First Trust

0.92

Correlation Coefficient

Principal Value  First Trust

Almost no diversification

The 3 months correlation between Principal and First is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Principal Value 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 Value 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 Value 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 Value i.e., Principal Value and First Trust go up and down completely randomly.

Pair Corralation between Principal Value and First Trust

Allowing for the 90-day total investment horizon Principal Value is expected to generate 1.87 times less return on investment than First Trust. But when comparing it to its historical volatility, Principal Value ETF is 1.29 times less risky than First Trust. It trades about 0.23 of its potential returns per unit of risk. First Trust Developed is currently generating about 0.34 of returns per unit of risk over similar time horizon. If you would invest  4,266  in First Trust Developed on April 25, 2025 and sell it today you would earn a total of  997.00  from holding First Trust Developed or generate 23.37% return on investment over 90 days.

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

Principal Value ETF  vs.  First Trust Developed

Principal Value ETF

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Value ETF are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, Principal Value may actually be approaching a critical reversion point that can send shares even higher in August 2025.

First Trust Developed

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Developed are ranked lower than 26 (%) 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 Value and First Trust

The main advantage of trading using opposite Principal Value and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Principal Value 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 Value 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.