Correlation Between Select STOXX and First Trust

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

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

Diversification Opportunities for Select STOXX and First Trust

-0.33

Correlation Coefficient

Select STOXX  First Trust

Very good diversification

The 3 months correlation between Select and First is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Select STOXX Europe and First Trust Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Water and Select STOXX 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 Select STOXX Europe 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 Water has no effect on the direction of Select STOXX i.e., Select STOXX and First Trust go up and down completely randomly.

Pair Corralation between Select STOXX and First Trust

Given the investment horizon of 90 days Select STOXX Europe is expected to generate 2.28 times more return on investment than First Trust. However, Select STOXX is 2.28 times more volatile than First Trust Water. It trades about 0.28 of its potential returns per unit of risk. First Trust Water is currently generating about -0.01 per unit of risk. If you would invest  2,457  in Select STOXX Europe on December 27, 2024 and sell it today you would earn a total of  982.00  from holding Select STOXX Europe or generate 39.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

Select STOXX Europe  vs.  First Trust Water

Select STOXX Europe

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Select STOXX Europe are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent basic indicators, Select STOXX exhibited solid returns over the last few months and may actually be approaching a breakup point.

First Trust Water

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Select STOXX and First Trust

The main advantage of trading using opposite Select STOXX and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Select STOXX 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 Select STOXX Europe and First Trust Water 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.

Check out your portfolio center.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.