Correlation Between First Trust and Innovator Russell

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

By analyzing existing cross correlation between First Trust Cboe and Innovator Russell 2000, you can compare the effects of market volatilities on First Trust and Innovator Russell 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 Innovator Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Innovator Russell.

Diversification Opportunities for First Trust and Innovator Russell

0.86

Correlation Coefficient

First Trust  Innovator Russell

Very poor diversification

The 3 months correlation between First and Innovator is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Cboe and Innovator Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Innovator Russell 2000 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 Cboe are associated (or correlated) with Innovator Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Innovator Russell 2000 has no effect on the direction of First Trust i.e., First Trust and Innovator Russell go up and down completely randomly.

Pair Corralation between First Trust and Innovator Russell

Given the investment horizon of 90 days First Trust Cboe is expected to generate 0.93 times more return on investment than Innovator Russell. However, First Trust Cboe is 1.08 times less risky than Innovator Russell. It trades about -0.04 of its potential returns per unit of risk. Innovator Russell 2000 is currently generating about -0.11 per unit of risk. If you would invest  3,052  in First Trust Cboe on December 29, 2024 and sell it today you would lose (52.00) from holding First Trust Cboe or give up 1.7% of portfolio value over 90 days.

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

First Trust Cboe  vs.  Innovator Russell 2000

First Trust Cboe

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust Cboe has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Innovator Russell 2000

Risk-Adjusted Performance

Very Weak

Over the last 90 days Innovator Russell 2000 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Innovator Russell is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with First Trust and Innovator Russell

The main advantage of trading using opposite First Trust and Innovator Russell positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust position performs unexpectedly, Innovator Russell 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 Innovator Russell will offset losses from the drop in Innovator Russell's long position.

The idea behind First Trust Cboe and Innovator Russell 2000 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.