Correlation Between First Trust and Invesco Water

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

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

Diversification Opportunities for First Trust and Invesco Water

0.81

Correlation Coefficient

First Trust  Invesco Water

Very poor diversification

The 3 months correlation between First and Invesco is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding First Trust NASDAQ and Invesco Water Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco Water Resources and First Trust 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 First Trust NASDAQ are associated (or correlated) with Invesco Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco Water Resources has no effect on the direction of First Trust i.e., First Trust and Invesco Water go up and down completely randomly.

Pair Corralation between First Trust and Invesco Water

Given the investment horizon of 90 days First Trust NASDAQ is expected to generate 1.0 times more return on investment than Invesco Water. However, First Trust is 1.0 times more volatile than Invesco Water Resources. It trades about -0.2 of its potential returns per unit of risk. Invesco Water Resources is currently generating about -0.38 per unit of risk. If you would invest  12,575  in First Trust NASDAQ on September 30, 2024 and sell it today you would lose (521.00) from holding First Trust NASDAQ or give up 4.14% of portfolio value over 90 days.

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

First Trust NASDAQ  vs.  Invesco Water Resources

First Trust NASDAQ

Risk-Adjusted Performance

0 of 100

Very Weak

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

Invesco Water Resources

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Invesco Water Resources has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical indicators, Invesco Water is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with First Trust and Invesco Water

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

The idea behind First Trust NASDAQ and Invesco Water Resources 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.