Correlation Between First Trust and VictoryShares

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

By analyzing existing cross correlation between First Trust SMID and VictoryShares EQ Income, you can compare the effects of market volatilities on First Trust and VictoryShares 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 VictoryShares. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and VictoryShares.

Diversification Opportunities for First Trust and VictoryShares

0.86

Correlation Coefficient

First Trust  VictoryShares

Very poor diversification

The 3 months correlation between First and VictoryShares is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding First Trust SMID and VictoryShares EQ Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VictoryShares EQ Income 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 SMID are associated (or correlated) with VictoryShares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VictoryShares EQ Income has no effect on the direction of First Trust i.e., First Trust and VictoryShares go up and down completely randomly.

Pair Corralation between First Trust and VictoryShares

Given the investment horizon of 90 days First Trust SMID is expected to generate 1.93 times more return on investment than VictoryShares. However, First Trust is 1.93 times more volatile than VictoryShares EQ Income. It trades about 0.07 of its potential returns per unit of risk. VictoryShares EQ Income is currently generating about 0.04 per unit of risk. If you would invest  2,536  in First Trust SMID on September 15, 2024 and sell it today you would earn a total of  1,283  from holding First Trust SMID or generate 50.59% return on investment over 90 days.

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

First Trust SMID  vs.  VictoryShares EQ Income

First Trust SMID

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust SMID are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

VictoryShares EQ Income

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in VictoryShares EQ Income are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, VictoryShares is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with First Trust and VictoryShares

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

The idea behind First Trust SMID and VictoryShares EQ Income 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.