Correlation Between WisdomTree Quality and First Trust

Can any of the company-specific risk be diversified away by investing in both WisdomTree 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 WisdomTree 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 WisdomTree Quality Dividend and First Trust NASDAQ 100 Technology, you can compare the effects of market volatilities on WisdomTree 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 WisdomTree Quality with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of WisdomTree Quality and First Trust.

Diversification Opportunities for WisdomTree Quality and First Trust

0.74

Correlation Coefficient

WisdomTree Quality  First Trust

Poor diversification

The 3 months correlation between WisdomTree and First is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding WisdomTree Quality Dividend and First Trust NASDAQ 100 Technol in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NASDAQ and WisdomTree 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 WisdomTree Quality Dividend 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 NASDAQ has no effect on the direction of WisdomTree Quality i.e., WisdomTree Quality and First Trust go up and down completely randomly.

Pair Corralation between WisdomTree Quality and First Trust

Given the investment horizon of 90 days WisdomTree Quality Dividend is expected to generate 0.47 times more return on investment than First Trust. However, WisdomTree Quality Dividend is 2.11 times less risky than First Trust. It trades about -0.06 of its potential returns per unit of risk. First Trust NASDAQ 100 Technology is currently generating about -0.1 per unit of risk. If you would invest  8,278  in WisdomTree Quality Dividend on December 5, 2024 and sell it today you would lose (92.00) from holding WisdomTree Quality Dividend or give up 1.11% of portfolio value over 90 days.

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

WisdomTree Quality Dividend  vs.  First Trust NASDAQ 100 Technol

WisdomTree Quality

Risk-Adjusted Performance

Very Weak

Over the last 90 days WisdomTree Quality Dividend has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, WisdomTree Quality is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

First Trust NASDAQ

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust NASDAQ 100 Technology has generated negative risk-adjusted returns adding no value to investors with long positions. 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 WisdomTree Quality and First Trust

The main advantage of trading using opposite WisdomTree Quality and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if WisdomTree 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 WisdomTree Quality Dividend and First Trust NASDAQ 100 Technology 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.