Correlation Between Alerian Energy and First Trust

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

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

Diversification Opportunities for Alerian Energy and First Trust

0.99

Correlation Coefficient

Alerian Energy  First Trust

No risk reduction

The 3 months correlation between Alerian and First is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Alerian Energy Infrastructure and First Trust North in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust North and Alerian Energy 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 Alerian Energy Infrastructure 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 North has no effect on the direction of Alerian Energy i.e., Alerian Energy and First Trust go up and down completely randomly.

Pair Corralation between Alerian Energy and First Trust

Given the investment horizon of 90 days Alerian Energy Infrastructure is expected to generate 1.13 times more return on investment than First Trust. However, Alerian Energy is 1.13 times more volatile than First Trust North. It trades about 0.19 of its potential returns per unit of risk. First Trust North is currently generating about 0.17 per unit of risk. If you would invest  2,170  in Alerian Energy Infrastructure on September 13, 2024 and sell it today you would earn a total of  982.00  from holding Alerian Energy Infrastructure or generate 45.25% return on investment over 90 days.

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

Alerian Energy Infrastructure  vs.  First Trust North

Alerian Energy Infra

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Alerian Energy Infrastructure are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical and fundamental indicators, Alerian Energy reported solid returns over the last few months and may actually be approaching a breakup point.

First Trust North

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust North are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak essential indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Alerian Energy and First Trust

The main advantage of trading using opposite Alerian Energy and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Alerian Energy 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 Alerian Energy Infrastructure and First Trust North 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.