Correlation Between Innovator and First Trust

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

By analyzing existing cross correlation between Innovator SP 500 and First Trust Cboe, you can compare the effects of market volatilities on Innovator 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 Innovator with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Innovator and First Trust.

Diversification Opportunities for Innovator and First Trust

0.99

Correlation Coefficient

Innovator  First Trust

No risk reduction

The 3 months correlation between Innovator and First is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Innovator SP 500 and First Trust Cboe in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Cboe and Innovator 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 Innovator SP 500 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 Cboe has no effect on the direction of Innovator i.e., Innovator and First Trust go up and down completely randomly.

Pair Corralation between Innovator and First Trust

Given the investment horizon of 90 days Innovator SP 500 is expected to generate 0.86 times more return on investment than First Trust. However, Innovator SP 500 is 1.16 times less risky than First Trust. It trades about -0.04 of its potential returns per unit of risk. First Trust Cboe is currently generating about -0.04 per unit of risk. If you would invest  3,848  in Innovator SP 500 on December 28, 2024 and sell it today you would lose (59.00) from holding Innovator SP 500 or give up 1.53% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.36%
Values	Daily Returns

Innovator SP 500  vs.  First Trust Cboe

Innovator SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days Innovator SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Innovator is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

First Trust Cboe

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust Cboe has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Innovator and First Trust

The main advantage of trading using opposite Innovator and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Innovator 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 Innovator SP 500 and First Trust Cboe 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.