Correlation Between First Trust and Energy Select

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

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

Diversification Opportunities for First Trust and Energy Select

0.99

Correlation Coefficient

First Trust  Energy Select

No risk reduction

The 3 months correlation between First and Energy is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Nasdaq and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector 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 Nasdaq are associated (or correlated) with Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of First Trust i.e., First Trust and Energy Select go up and down completely randomly.

Pair Corralation between First Trust and Energy Select

Given the investment horizon of 90 days First Trust is expected to generate 1.08 times less return on investment than Energy Select. In addition to that, First Trust is 1.14 times more volatile than Energy Select Sector. It trades about 0.05 of its total potential returns per unit of risk. Energy Select Sector is currently generating about 0.06 per unit of volatility. If you would invest  8,586  in Energy Select Sector on September 15, 2024 and sell it today you would earn a total of  336.00  from holding Energy Select Sector or generate 3.91% return on investment over 90 days.

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

First Trust Nasdaq  vs.  Energy Select Sector

First Trust Nasdaq

Risk-Adjusted Performance

3 of 100

Insignificant

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

Energy Select Sector

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound essential indicators, Energy Select 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 Energy Select

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

The idea behind First Trust Nasdaq and Energy Select Sector 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.