Correlation Between First Trust and IShares Regional

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

By analyzing existing cross correlation between First Trust Financials and iShares Regional Banks, you can compare the effects of market volatilities on First Trust and IShares Regional 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 IShares Regional. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and IShares Regional.

Diversification Opportunities for First Trust and IShares Regional

0.93

Correlation Coefficient

First Trust  IShares Regional

Almost no diversification

The 3 months correlation between First and IShares is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Financials and iShares Regional Banks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Regional Banks 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 Financials are associated (or correlated) with IShares Regional. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Regional Banks has no effect on the direction of First Trust i.e., First Trust and IShares Regional go up and down completely randomly.

Pair Corralation between First Trust and IShares Regional

Considering the 90-day investment horizon First Trust Financials is expected to generate 0.82 times more return on investment than IShares Regional. However, First Trust Financials is 1.21 times less risky than IShares Regional. It trades about 0.01 of its potential returns per unit of risk. iShares Regional Banks is currently generating about -0.07 per unit of risk. If you would invest  5,416  in First Trust Financials on December 28, 2024 and sell it today you would earn a total of  1.00  from holding First Trust Financials or generate 0.02% 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 Financials  vs.  iShares Regional Banks

First Trust Financials

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust Financials has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

iShares Regional Banks

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Regional Banks has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, IShares Regional is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with First Trust and IShares Regional

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

The idea behind First Trust Financials and iShares Regional Banks 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 Transaction History module to view history of all your transactions and understand their impact on performance.