Correlation Between First Trust and ARK Innovation

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

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

Diversification Opportunities for First Trust and ARK Innovation

0.84

Correlation Coefficient

First Trust  ARK Innovation

Very poor diversification

The 3 months correlation between First and ARK is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Equity and ARK Innovation ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARK Innovation ETF 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 Equity are associated (or correlated) with ARK Innovation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARK Innovation ETF has no effect on the direction of First Trust i.e., First Trust and ARK Innovation go up and down completely randomly.

Pair Corralation between First Trust and ARK Innovation

Considering the 90-day investment horizon First Trust Equity is expected to under-perform the ARK Innovation. But the etf apears to be less risky and, when comparing its historical volatility, First Trust Equity is 1.29 times less risky than ARK Innovation. The etf trades about -0.02 of its potential returns per unit of risk. The ARK Innovation ETF is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  5,798  in ARK Innovation ETF on November 28, 2024 and sell it today you would lose (198.00) from holding ARK Innovation ETF or give up 3.41% of portfolio value over 90 days.

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

First Trust Equity  vs.  ARK Innovation ETF

First Trust Equity

Risk-Adjusted Performance

Very Weak

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

ARK Innovation ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days ARK Innovation ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent forward-looking signals, ARK Innovation is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with First Trust and ARK Innovation

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

The idea behind First Trust Equity and ARK Innovation ETF 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.