Correlation Between FlexShares Quality and First Trust

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

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

Diversification Opportunities for FlexShares Quality and First Trust

0.9

Correlation Coefficient

FlexShares Quality  First Trust

Almost no diversification

The 3 months correlation between FlexShares and First is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding FlexShares Quality Dividend and First Trust Rising in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Rising and FlexShares Quality 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 FlexShares Quality Dividend 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 Rising has no effect on the direction of FlexShares Quality i.e., FlexShares Quality and First Trust go up and down completely randomly.

Pair Corralation between FlexShares Quality and First Trust

Considering the 90-day investment horizon FlexShares Quality is expected to generate 1.15 times less return on investment than First Trust. But when comparing it to its historical volatility, FlexShares Quality Dividend is 1.33 times less risky than First Trust. It trades about 0.1 of its potential returns per unit of risk. First Trust Rising is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  4,264  in First Trust Rising on September 5, 2024 and sell it today you would earn a total of  2,149  from holding First Trust Rising or generate 50.4% return on investment over 90 days.

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

FlexShares Quality Dividend  vs.  First Trust Rising

FlexShares Quality

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in FlexShares Quality Dividend are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental indicators, FlexShares Quality may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust Rising

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Rising are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, First Trust showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with FlexShares Quality and First Trust

The main advantage of trading using opposite FlexShares Quality and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if FlexShares Quality 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 FlexShares Quality Dividend and First Trust Rising 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.