Correlation Between ProShares Merger and First Trust

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

By analyzing existing cross correlation between ProShares Merger ETF and First Trust LongShort, you can compare the effects of market volatilities on ProShares Merger 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 ProShares Merger with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of ProShares Merger and First Trust.

Diversification Opportunities for ProShares Merger and First Trust

0.4

Correlation Coefficient

ProShares Merger  First Trust

Very weak diversification

The 3 months correlation between ProShares and First is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding ProShares Merger ETF and First Trust LongShort in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust LongShort and ProShares Merger 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 ProShares Merger ETF 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 LongShort has no effect on the direction of ProShares Merger i.e., ProShares Merger and First Trust go up and down completely randomly.

Pair Corralation between ProShares Merger and First Trust

Given the investment horizon of 90 days ProShares Merger is expected to generate 2.45 times less return on investment than First Trust. But when comparing it to its historical volatility, ProShares Merger ETF is 2.88 times less risky than First Trust. It trades about 0.14 of its potential returns per unit of risk. First Trust LongShort is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  4,837  in First Trust LongShort on October 27, 2024 and sell it today you would earn a total of  1,970  from holding First Trust LongShort or generate 40.73% return on investment over 90 days.

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

ProShares Merger ETF  vs.  First Trust LongShort

ProShares Merger ETF

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ProShares Merger ETF are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical and fundamental indicators, ProShares Merger is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

First Trust LongShort

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust LongShort are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable essential indicators, First Trust is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with ProShares Merger and First Trust

The main advantage of trading using opposite ProShares Merger and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ProShares Merger 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 ProShares Merger ETF and First Trust LongShort 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.

Check out your portfolio center.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.