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 Municipal and First Trust Flexible, 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

0.72

Correlation Coefficient

Overlay Shares  First Trust

Poor diversification

The 3 months correlation between Overlay and First is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Overlay Shares Municipal and First Trust Flexible in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Flexible 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 Municipal 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 Flexible 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

Considering the 90-day investment horizon Overlay Shares Municipal is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, Overlay Shares Municipal is 1.36 times less risky than First Trust. The etf trades about -0.1 of its potential returns per unit of risk. The First Trust Flexible is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  1,733  in First Trust Flexible on October 7, 2024 and sell it today you would lose (28.00) from holding First Trust Flexible or give up 1.62% of portfolio value over 90 days.

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

Overlay Shares Municipal  vs.  First Trust Flexible

Overlay Shares Municipal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Overlay Shares Municipal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Overlay Shares is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

First Trust Flexible

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust Flexible has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong essential indicators, First Trust is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

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 Municipal and First Trust Flexible 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.