Correlation Between Overlay Shares and First Trust

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

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

Diversification Opportunities for Overlay Shares and First Trust

0.8

Correlation Coefficient

Overlay Shares  First Trust

Very poor diversification

The 3 months correlation between Overlay and First is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Overlay Shares Hedged and First Trust Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Exchange and Overlay Shares 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 Overlay Shares Hedged 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 Exchange has no effect on the direction of Overlay Shares i.e., Overlay Shares and First Trust go up and down completely randomly.

Pair Corralation between Overlay Shares and First Trust

Given the investment horizon of 90 days Overlay Shares is expected to generate 3.13 times less return on investment than First Trust. In addition to that, Overlay Shares is 1.43 times more volatile than First Trust Exchange. It trades about 0.03 of its total potential returns per unit of risk. First Trust Exchange is currently generating about 0.13 per unit of volatility. If you would invest  2,687  in First Trust Exchange on October 10, 2024 and sell it today you would earn a total of  79.00  from holding First Trust Exchange or generate 2.94% return on investment over 90 days.

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

Overlay Shares Hedged  vs.  First Trust Exchange

Overlay Shares Hedged

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Overlay Shares Hedged are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong essential indicators, Overlay Shares is not utilizing all of its potentials. The newest stock price confusion, may contribute to short-horizon losses for the traders.

First Trust Exchange

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Overlay Shares and First Trust

The main advantage of trading using opposite Overlay Shares and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Overlay Shares 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 Overlay Shares Hedged and First Trust Exchange 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.