Correlation Between Invesco DWA and First Trust

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

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

Diversification Opportunities for Invesco DWA and First Trust

0.98

Correlation Coefficient

Invesco DWA  First Trust

Almost no diversification

The 3 months correlation between Invesco and First is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Invesco DWA Financial and First Trust RBA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust RBA and Invesco DWA 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 Invesco DWA Financial 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 RBA has no effect on the direction of Invesco DWA i.e., Invesco DWA and First Trust go up and down completely randomly.

Pair Corralation between Invesco DWA and First Trust

Considering the 90-day investment horizon Invesco DWA is expected to generate 1.47 times less return on investment than First Trust. But when comparing it to its historical volatility, Invesco DWA Financial is 1.27 times less risky than First Trust. It trades about 0.07 of its potential returns per unit of risk. First Trust RBA is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  4,458  in First Trust RBA on September 28, 2024 and sell it today you would earn a total of  3,282  from holding First Trust RBA or generate 73.61% return on investment over 90 days.

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

Invesco DWA Financial  vs.  First Trust RBA

Invesco DWA Financial

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco DWA Financial are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain technical and fundamental indicators, Invesco DWA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust RBA

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust RBA are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, First Trust is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Invesco DWA and First Trust

The main advantage of trading using opposite Invesco DWA and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Invesco DWA 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 Invesco DWA Financial and First Trust RBA 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.