Correlation Between Industrial Select and First Trust

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

Diversification Opportunities for Industrial Select and First Trust

0.62

Correlation Coefficient

Industrial Select  First Trust

Poor diversification

The 3 months correlation between Industrial and First is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and First Trust Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Health and Industrial 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 Industrial 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 Health has no effect on the direction of Industrial Select i.e., Industrial Select and First Trust go up and down completely randomly.

Pair Corralation between Industrial Select and First Trust

Considering the 90-day investment horizon Industrial Select Sector is expected to generate 1.06 times more return on investment than First Trust. However, Industrial Select is 1.06 times more volatile than First Trust Health. It trades about 0.07 of its potential returns per unit of risk. First Trust Health is currently generating about 0.01 per unit of risk. If you would invest  8,864  in Industrial Select Sector on January 31, 2024 and sell it today you would earn a total of  3,484  from holding Industrial Select Sector or generate 39.31% return on investment over 90 days.

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

Industrial Select Sector  vs.  First Trust Health

Industrial Select Sector

Risk-Adjusted Performance

16 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial Select Sector are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak essential indicators, Industrial Select may actually be approaching a critical reversion point that can send shares even higher in May 2024.

First Trust Health

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Health are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, First Trust is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Industrial Select and First Trust

The main advantage of trading using opposite Industrial Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Industrial 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 Industrial Select Sector and First Trust Health 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.