Correlation Between First Trust and Invesco SP

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Can any of the company-specific risk be diversified away by investing in both First Trust and Invesco 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 Invesco SP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between First Trust Energy and Invesco SP SmallCap, you can compare the effects of market volatilities on First Trust and Invesco 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 Invesco SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Invesco SP.

Diversification Opportunities for First Trust and Invesco SP

FirstInvescoDiversified AwayFirstInvescoDiversified Away100%
0.8
  Correlation Coefficient

Very poor diversification

The 3 months correlation between First and Invesco is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Energy and Invesco SP SmallCap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco SP SmallCap 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 Energy are associated (or correlated) with Invesco SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco SP SmallCap has no effect on the direction of First Trust i.e., First Trust and Invesco SP go up and down completely randomly.

Pair Corralation between First Trust and Invesco SP

Considering the 90-day investment horizon First Trust Energy is expected to under-perform the Invesco SP. But the etf apears to be less risky and, when comparing its historical volatility, First Trust Energy is 1.42 times less risky than Invesco SP. The etf trades about -0.18 of its potential returns per unit of risk. The Invesco SP SmallCap is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  5,169  in Invesco SP SmallCap on September 15, 2024 and sell it today you would lose (184.00) from holding Invesco SP SmallCap or give up 3.56% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy95.45%
ValuesDaily Returns

First Trust Energy  vs.  Invesco SP SmallCap

 Performance 
JavaScript chart by amCharts 3.21.15OctNov -5051015
JavaScript chart by amCharts 3.21.15FXN PSCE
       Timeline  
First Trust Energy 

Risk-Adjusted Performance

3 of 100

 
Weak
 
Strong
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Energy 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 current stock price disarray, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15OctNovDecNovDec1616.51717.518
Invesco SP SmallCap 

Risk-Adjusted Performance

2 of 100

 
Weak
 
Strong
Weak
Compared to the overall equity markets, risk-adjusted returns on investments in Invesco SP SmallCap are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Invesco SP is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.
JavaScript chart by amCharts 3.21.15OctNovDecNovDec48495051525354

First Trust and Invesco SP Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-4.5-3.37-2.24-1.110.01921.152.313.464.62 0.050.100.150.20
JavaScript chart by amCharts 3.21.15FXN PSCE
       Returns  

Pair Trading with First Trust and Invesco SP

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

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