Correlation Between First Trust and Small Cap

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

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

Diversification Opportunities for First Trust and Small Cap

0.62

Correlation Coefficient

First Trust  Small Cap

Poor diversification

The 3 months correlation between First and Small is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Enhanced and Small Cap Premium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Premium 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 Enhanced are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Premium has no effect on the direction of First Trust i.e., First Trust and Small Cap go up and down completely randomly.

Pair Corralation between First Trust and Small Cap

Considering the 90-day investment horizon First Trust Enhanced is expected to generate 1.04 times more return on investment than Small Cap. However, First Trust is 1.04 times more volatile than Small Cap Premium. It trades about 0.22 of its potential returns per unit of risk. Small Cap Premium is currently generating about -0.03 per unit of risk. If you would invest  2,072  in First Trust Enhanced on September 12, 2024 and sell it today you would earn a total of  42.00  from holding First Trust Enhanced or generate 2.03% return on investment over 90 days.

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

First Trust Enhanced  vs.  Small Cap Premium

First Trust Enhanced

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Enhanced are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat inconsistent technical and fundamental indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Small Cap Premium

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with First Trust and Small Cap

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

The idea behind First Trust Enhanced and Small Cap Premium 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.