Correlation Between First Trust and Invesco KBW

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

By analyzing existing cross correlation between First Trust NASDAQ 100 and Invesco KBW Regional, you can compare the effects of market volatilities on First Trust and Invesco KBW 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 First Trust with a short position of Invesco KBW. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Invesco KBW.

Diversification Opportunities for First Trust and Invesco KBW

0.94

Correlation Coefficient

First Trust  Invesco KBW

Almost no diversification

The 3 months correlation between First and Invesco is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding First Trust NASDAQ 100 and Invesco KBW Regional in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco KBW Regional and First Trust 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 First Trust NASDAQ 100 are associated (or correlated) with Invesco KBW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco KBW Regional has no effect on the direction of First Trust i.e., First Trust and Invesco KBW go up and down completely randomly.

Pair Corralation between First Trust and Invesco KBW

Given the investment horizon of 90 days First Trust is expected to generate 2.7 times less return on investment than Invesco KBW. But when comparing it to its historical volatility, First Trust NASDAQ 100 is 3.5 times less risky than Invesco KBW. It trades about 0.13 of its potential returns per unit of risk. Invesco KBW Regional is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  5,627  in Invesco KBW Regional on September 16, 2024 and sell it today you would earn a total of  805.00  from holding Invesco KBW Regional or generate 14.31% return on investment over 90 days.

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

First Trust NASDAQ 100  vs.  Invesco KBW Regional

First Trust NASDAQ

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NASDAQ 100 are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, First Trust is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Invesco KBW Regional

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco KBW Regional are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Invesco KBW reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Trust and Invesco KBW

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

The idea behind First Trust NASDAQ 100 and Invesco KBW Regional 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.