Correlation Between First Trust and Innovator

Can any of the company-specific risk be diversified away by investing in both First Trust and Innovator 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 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 SP 500, you can compare the effects of market volatilities on First Trust and Innovator 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. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Innovator.

Diversification Opportunities for First Trust and Innovator

0.96

Correlation Coefficient

First Trust  Innovator

Almost no diversification

The 3 months correlation between First and Innovator is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Cboe and Innovator SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Innovator SP 500 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. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Innovator SP 500 has no effect on the direction of First Trust i.e., First Trust and Innovator go up and down completely randomly.

Pair Corralation between First Trust and Innovator

Given the investment horizon of 90 days First Trust Cboe is expected to generate 2.38 times more return on investment than Innovator. However, First Trust is 2.38 times more volatile than Innovator SP 500. It trades about 0.2 of its potential returns per unit of risk. Innovator SP 500 is currently generating about 0.25 per unit of risk. If you would invest  2,958  in First Trust Cboe on September 16, 2024 and sell it today you would earn a total of  114.00  from holding First Trust Cboe or generate 3.85% return on investment over 90 days.

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

First Trust Cboe  vs.  Innovator SP 500

First Trust Cboe

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Cboe are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. 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 SP 500

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Innovator SP 500 are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Innovator is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with First Trust and Innovator

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

The idea behind First Trust Cboe and Innovator SP 500 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.