Correlation Between First Trust and Principal Exchange

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

By analyzing existing cross correlation between First Trust Preferred and Principal Exchange Traded Funds, you can compare the effects of market volatilities on First Trust and Principal Exchange 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 Principal Exchange. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Principal Exchange.

Diversification Opportunities for First Trust and Principal Exchange

0.89

Correlation Coefficient

First Trust  Principal Exchange

Very poor diversification

The 3 months correlation between First and Principal is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Preferred and Principal Exchange Traded Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Exchange 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 Preferred are associated (or correlated) with Principal Exchange. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Exchange has no effect on the direction of First Trust i.e., First Trust and Principal Exchange go up and down completely randomly.

Pair Corralation between First Trust and Principal Exchange

Considering the 90-day investment horizon First Trust is expected to generate 1.71 times less return on investment than Principal Exchange. In addition to that, First Trust is 1.47 times more volatile than Principal Exchange Traded Funds. It trades about 0.05 of its total potential returns per unit of risk. Principal Exchange Traded Funds is currently generating about 0.12 per unit of volatility. If you would invest  1,881  in Principal Exchange Traded Funds on December 29, 2024 and sell it today you would earn a total of  25.00  from holding Principal Exchange Traded Funds or generate 1.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

First Trust Preferred  vs.  Principal Exchange Traded Fund

First Trust Preferred

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Preferred are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, First Trust is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Principal Exchange

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Exchange Traded Funds are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong fundamental indicators, Principal Exchange is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with First Trust and Principal Exchange

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

The idea behind First Trust Preferred and Principal Exchange Traded Funds 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.