Correlation Between First Trust and SPDR SP

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

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

Diversification Opportunities for First Trust and SPDR SP

0.74

Correlation Coefficient

First Trust  SPDR SP

Poor diversification

The 3 months correlation between First and SPDR is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Water and SPDR SP Metals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP Metals 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 Water are associated (or correlated) with SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP Metals has no effect on the direction of First Trust i.e., First Trust and SPDR SP go up and down completely randomly.

Pair Corralation between First Trust and SPDR SP

Considering the 90-day investment horizon First Trust Water is expected to generate 0.78 times more return on investment than SPDR SP. However, First Trust Water is 1.29 times less risky than SPDR SP. It trades about -0.3 of its potential returns per unit of risk. SPDR SP Metals is currently generating about -0.74 per unit of risk. If you would invest  10,921  in First Trust Water on September 23, 2024 and sell it today you would lose (632.00) from holding First Trust Water or give up 5.79% of portfolio value over 90 days.

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

First Trust Water  vs.  SPDR SP Metals

First Trust Water

Risk-Adjusted Performance

0 of 100

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.

SPDR SP Metals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SPDR SP Metals has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, SPDR SP 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 SPDR SP

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

The idea behind First Trust Water and SPDR SP Metals 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.