Correlation Between Energy Select and First Trust

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

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

Diversification Opportunities for Energy Select and First Trust

0.96

Correlation Coefficient

Energy Select  First Trust

Almost no diversification

The 3 months correlation between Energy and First is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector and First Trust Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Energy and Energy Select 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 Energy Select Sector 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 Energy has no effect on the direction of Energy Select i.e., Energy Select and First Trust go up and down completely randomly.

Pair Corralation between Energy Select and First Trust

Considering the 90-day investment horizon Energy Select Sector is expected to generate 0.88 times more return on investment than First Trust. However, Energy Select Sector is 1.13 times less risky than First Trust. It trades about 0.03 of its potential returns per unit of risk. First Trust Energy is currently generating about 0.01 per unit of risk. If you would invest  8,315  in Energy Select Sector on September 14, 2024 and sell it today you would earn a total of  652.00  from holding Energy Select Sector or generate 7.84% return on investment over 90 days.

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

Energy Select Sector  vs.  First Trust Energy

Energy Select Sector

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound essential indicators, Energy Select is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

First Trust Energy

Risk-Adjusted Performance

4 of 100

Insignificant

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

Pair Trading with Energy Select and First Trust

The main advantage of trading using opposite Energy Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Energy Select 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 Energy Select Sector and First Trust Energy 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.