Correlation Between IShares Morningstar and First Trust

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

By analyzing existing cross correlation between iShares Morningstar Mid Cap and First Trust SMID, you can compare the effects of market volatilities on IShares Morningstar and First Trust 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 IShares Morningstar with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Morningstar and First Trust.

Diversification Opportunities for IShares Morningstar and First Trust

0.81

Correlation Coefficient

IShares Morningstar  First Trust

Very poor diversification

The 3 months correlation between IShares and First is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding iShares Morningstar Mid Cap and First Trust SMID in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust SMID and IShares Morningstar 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 iShares Morningstar Mid Cap are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust SMID has no effect on the direction of IShares Morningstar i.e., IShares Morningstar and First Trust go up and down completely randomly.

Pair Corralation between IShares Morningstar and First Trust

Given the investment horizon of 90 days iShares Morningstar Mid Cap is expected to generate 0.72 times more return on investment than First Trust. However, iShares Morningstar Mid Cap is 1.4 times less risky than First Trust. It trades about 0.04 of its potential returns per unit of risk. First Trust SMID is currently generating about 0.03 per unit of risk. If you would invest  6,500  in iShares Morningstar Mid Cap on October 24, 2024 and sell it today you would earn a total of  1,189  from holding iShares Morningstar Mid Cap or generate 18.29% return on investment over 90 days.

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

iShares Morningstar Mid Cap  vs.  First Trust SMID

iShares Morningstar Mid

Risk-Adjusted Performance

1 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Morningstar Mid Cap are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable fundamental indicators, IShares Morningstar is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

First Trust SMID

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust SMID are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile technical and fundamental indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with IShares Morningstar and First Trust

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

The idea behind iShares Morningstar Mid Cap and First Trust SMID 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.