Correlation Between MicroSectors Solactive and First Trust

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

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

Diversification Opportunities for MicroSectors Solactive and First Trust

0.86

Correlation Coefficient

MicroSectors Solactive  First Trust

Very poor diversification

The 3 months correlation between MicroSectors and First is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors Solactive FANG and First Trust Exchange Traded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Exchange and MicroSectors Solactive 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 MicroSectors Solactive FANG 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 Exchange has no effect on the direction of MicroSectors Solactive i.e., MicroSectors Solactive and First Trust go up and down completely randomly.

Pair Corralation between MicroSectors Solactive and First Trust

Given the investment horizon of 90 days MicroSectors Solactive FANG is expected to generate 23.05 times more return on investment than First Trust. However, MicroSectors Solactive is 23.05 times more volatile than First Trust Exchange Traded. It trades about 0.11 of its potential returns per unit of risk. First Trust Exchange Traded is currently generating about 0.27 per unit of risk. If you would invest  13,841  in MicroSectors Solactive FANG on October 1, 2024 and sell it today you would earn a total of  3,828  from holding MicroSectors Solactive FANG or generate 27.66% return on investment over 90 days.

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

MicroSectors Solactive FANG  vs.  First Trust Exchange Traded

MicroSectors Solactive

Risk-Adjusted Performance

8 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors Solactive FANG are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting essential indicators, MicroSectors Solactive showed solid returns over the last few months and may actually be approaching a breakup point.

First Trust Exchange

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with MicroSectors Solactive and First Trust

The main advantage of trading using opposite MicroSectors Solactive and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MicroSectors Solactive 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 MicroSectors Solactive FANG and First Trust Exchange Traded 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.