Correlation Between First Trust and MicroSectors Travel

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

By analyzing existing cross correlation between First Trust Consumer and MicroSectors Travel 3X, you can compare the effects of market volatilities on First Trust and MicroSectors Travel 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 MicroSectors Travel. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and MicroSectors Travel.

Diversification Opportunities for First Trust and MicroSectors Travel

0.89

Correlation Coefficient

First Trust  MicroSectors Travel

Very poor diversification

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

Pair Corralation between First Trust and MicroSectors Travel

Considering the 90-day investment horizon First Trust is expected to generate 3.51 times less return on investment than MicroSectors Travel. But when comparing it to its historical volatility, First Trust Consumer is 3.4 times less risky than MicroSectors Travel. It trades about 0.11 of its potential returns per unit of risk. MicroSectors Travel 3X is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  5,248  in MicroSectors Travel 3X on September 26, 2024 and sell it today you would earn a total of  814.00  from holding MicroSectors Travel 3X or generate 15.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	97.62%
Values	Daily Returns

First Trust Consumer  vs.  MicroSectors Travel 3X

First Trust Consumer

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Consumer are ranked lower than 5 (%) 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 recent stock price tumult, may contribute to shorter-term losses for the shareholders.

MicroSectors Travel

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors Travel 3X are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting basic indicators, MicroSectors Travel unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Trust and MicroSectors Travel

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

The idea behind First Trust Consumer and MicroSectors Travel 3X 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.