Correlation Between Invesco FTSE and IShares Morningstar

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

By analyzing existing cross correlation between Invesco FTSE RAFI and iShares Morningstar Small Cap, you can compare the effects of market volatilities on Invesco FTSE and IShares Morningstar 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 FTSE with a short position of IShares Morningstar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Invesco FTSE and IShares Morningstar.

Diversification Opportunities for Invesco FTSE and IShares Morningstar

0.99

Correlation Coefficient

Invesco FTSE  IShares Morningstar

No risk reduction

The 3 months correlation between Invesco and IShares is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Invesco FTSE RAFI and iShares Morningstar Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Morningstar and Invesco FTSE 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 FTSE RAFI are associated (or correlated) with IShares Morningstar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Morningstar has no effect on the direction of Invesco FTSE i.e., Invesco FTSE and IShares Morningstar go up and down completely randomly.

Pair Corralation between Invesco FTSE and IShares Morningstar

Given the investment horizon of 90 days Invesco FTSE RAFI is expected to under-perform the IShares Morningstar. In addition to that, Invesco FTSE is 1.03 times more volatile than iShares Morningstar Small Cap. It trades about -0.1 of its total potential returns per unit of risk. iShares Morningstar Small Cap is currently generating about -0.08 per unit of volatility. If you would invest  5,891  in iShares Morningstar Small Cap on December 20, 2024 and sell it today you would lose (313.00) from holding iShares Morningstar Small Cap or give up 5.31% of portfolio value over 90 days.

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

Invesco FTSE RAFI  vs.  iShares Morningstar Small Cap

Invesco FTSE RAFI

Risk-Adjusted Performance

Very Weak

Over the last 90 days Invesco FTSE RAFI has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.

iShares Morningstar

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Morningstar Small Cap has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, IShares Morningstar is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Invesco FTSE and IShares Morningstar

The main advantage of trading using opposite Invesco FTSE and IShares Morningstar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Invesco FTSE position performs unexpectedly, IShares Morningstar 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 IShares Morningstar will offset losses from the drop in IShares Morningstar's long position.

The idea behind Invesco FTSE RAFI and iShares Morningstar Small Cap 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.