Correlation Between Arrow DWA and First Trust

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

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

Diversification Opportunities for Arrow DWA and First Trust

0.95

Correlation Coefficient

Arrow DWA  First Trust

Almost no diversification

The 3 months correlation between Arrow and First is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Arrow DWA Tactical and First Trust Dorsey in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Dorsey and Arrow DWA 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 Arrow DWA Tactical 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 Dorsey has no effect on the direction of Arrow DWA i.e., Arrow DWA and First Trust go up and down completely randomly.

Pair Corralation between Arrow DWA and First Trust

Given the investment horizon of 90 days Arrow DWA is expected to generate 1.79 times less return on investment than First Trust. But when comparing it to its historical volatility, Arrow DWA Tactical is 1.22 times less risky than First Trust. It trades about 0.16 of its potential returns per unit of risk. First Trust Dorsey is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  2,356  in First Trust Dorsey on September 5, 2024 and sell it today you would earn a total of  376.00  from holding First Trust Dorsey or generate 15.96% return on investment over 90 days.

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

Arrow DWA Tactical  vs.  First Trust Dorsey

Arrow DWA Tactical

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Arrow DWA Tactical are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Arrow DWA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust Dorsey

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Dorsey are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite fairly abnormal essential indicators, First Trust demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Arrow DWA and First Trust

The main advantage of trading using opposite Arrow DWA and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Arrow DWA 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 Arrow DWA Tactical and First Trust Dorsey 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .