Correlation Between Consumer Discretionary and First Trust

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

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

Diversification Opportunities for Consumer Discretionary and First Trust

0.6

Correlation Coefficient

Consumer Discretionary  First Trust

Poor diversification

The 3 months correlation between Consumer and First is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Discretionary Select and First Trust S Network in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust S and Consumer Discretionary 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 Consumer Discretionary Select 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 S has no effect on the direction of Consumer Discretionary i.e., Consumer Discretionary and First Trust go up and down completely randomly.

Pair Corralation between Consumer Discretionary and First Trust

Considering the 90-day investment horizon Consumer Discretionary is expected to generate 2.58 times less return on investment than First Trust. But when comparing it to its historical volatility, Consumer Discretionary Select is 1.23 times less risky than First Trust. It trades about 0.19 of its potential returns per unit of risk. First Trust S Network is currently generating about 0.4 of returns per unit of risk over similar time horizon. If you would invest  5,367  in First Trust S Network on February 20, 2024 and sell it today you would earn a total of  580.00  from holding First Trust S Network or generate 10.81% return on investment over 90 days.

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

Consumer Discretionary Select  vs.  First Trust S Network

Consumer Discretionary

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Consumer Discretionary Select has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong essential indicators, Consumer Discretionary is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

First Trust S

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust S Network are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Consumer Discretionary and First Trust

The main advantage of trading using opposite Consumer Discretionary and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Consumer Discretionary 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 Consumer Discretionary Select and First Trust S Network 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.