Correlation Between Financial Select and First Trust

Can any of the company-specific risk be diversified away by investing in both Financial 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 Financial 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 Financial Select Sector and First Trust Dow, you can compare the effects of market volatilities on Financial 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 Financial Select with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Select and First Trust.

Diversification Opportunities for Financial Select and First Trust

0.56

Correlation Coefficient

Financial Select  First Trust

Very weak diversification

The 3 months correlation between Financial and First is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and First Trust Dow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Dow and Financial 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 Financial 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 Dow has no effect on the direction of Financial Select i.e., Financial Select and First Trust go up and down completely randomly.

Pair Corralation between Financial Select and First Trust

Considering the 90-day investment horizon Financial Select Sector is expected to generate 0.97 times more return on investment than First Trust. However, Financial Select Sector is 1.03 times less risky than First Trust. It trades about -0.11 of its potential returns per unit of risk. First Trust Dow is currently generating about -0.35 per unit of risk. If you would invest  5,126  in Financial Select Sector on December 5, 2024 and sell it today you would lose (134.00) from holding Financial Select Sector or give up 2.61% of portfolio value over 90 days.

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

Financial Select Sector  vs.  First Trust Dow

Financial Select Sector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

First Trust Dow

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Trust Dow has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental 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 Financial Select and First Trust

The main advantage of trading using opposite Financial Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial 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 Financial Select Sector and First Trust Dow 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.