Correlation Between Principal and Exchange Traded

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

By analyzing existing cross correlation between Principal and Exchange Traded Concepts, you can compare the effects of market volatilities on Principal and Exchange Traded 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 Principal with a short position of Exchange Traded. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal and Exchange Traded.

Diversification Opportunities for Principal and Exchange Traded

-0.55

Correlation Coefficient

Principal  Exchange Traded

Excellent diversification

The 3 months correlation between Principal and Exchange is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Principal and Exchange Traded Concepts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exchange Traded Concepts and Principal 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 Principal are associated (or correlated) with Exchange Traded. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exchange Traded Concepts has no effect on the direction of Principal i.e., Principal and Exchange Traded go up and down completely randomly.

Pair Corralation between Principal and Exchange Traded

Given the investment horizon of 90 days Principal is expected to generate 0.4 times more return on investment than Exchange Traded. However, Principal is 2.48 times less risky than Exchange Traded. It trades about 0.03 of its potential returns per unit of risk. Exchange Traded Concepts is currently generating about -0.11 per unit of risk. If you would invest  3,341  in Principal on September 25, 2024 and sell it today you would earn a total of  608.00  from holding Principal or generate 18.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	34.92%
Values	Daily Returns

Principal  vs.  Exchange Traded Concepts

Principal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Principal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Principal is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Exchange Traded Concepts

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Exchange Traded Concepts has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Exchange Traded is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Principal and Exchange Traded

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

The idea behind Principal and Exchange Traded Concepts 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.