Correlation Between First Trust and SPDR SP

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

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

Diversification Opportunities for First Trust and SPDR SP

0.43

Correlation Coefficient

First Trust  SPDR SP

Very weak diversification

The 3 months correlation between First and SPDR is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Indxx and SPDR SP Transportation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP Transportation 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 Indxx are associated (or correlated) with SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP Transportation has no effect on the direction of First Trust i.e., First Trust and SPDR SP go up and down completely randomly.

Pair Corralation between First Trust and SPDR SP

Given the investment horizon of 90 days First Trust is expected to generate 13.81 times less return on investment than SPDR SP. But when comparing it to its historical volatility, First Trust Indxx is 1.2 times less risky than SPDR SP. It trades about 0.02 of its potential returns per unit of risk. SPDR SP Transportation is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  7,886  in SPDR SP Transportation on September 14, 2024 and sell it today you would earn a total of  1,320  from holding SPDR SP Transportation or generate 16.74% return on investment over 90 days.

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

First Trust Indxx  vs.  SPDR SP Transportation

First Trust Indxx

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Indxx are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, First Trust is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

SPDR SP Transportation

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP Transportation are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting basic indicators, SPDR SP displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Trust and SPDR SP

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

The idea behind First Trust Indxx and SPDR SP Transportation 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.