Correlation Between IShares Morningstar and First Trust

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

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

Diversification Opportunities for IShares Morningstar and First Trust

0.99

Correlation Coefficient

IShares Morningstar  First Trust

No risk reduction

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

Pair Corralation between IShares Morningstar and First Trust

Considering the 90-day investment horizon IShares Morningstar is expected to generate 1.35 times less return on investment than First Trust. But when comparing it to its historical volatility, iShares Morningstar Small Cap is 1.17 times less risky than First Trust. It trades about 0.21 of its potential returns per unit of risk. First Trust Small is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  6,971  in First Trust Small on September 2, 2024 and sell it today you would earn a total of  1,493  from holding First Trust Small or generate 21.42% return on investment over 90 days.

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

iShares Morningstar Small Cap  vs.  First Trust Small

iShares Morningstar

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Morningstar Small Cap are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite quite fragile forward-looking signals, IShares Morningstar disclosed solid returns over the last few months and may actually be approaching a breakup point.

First Trust Small

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Small are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, First Trust exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with IShares Morningstar and First Trust

The main advantage of trading using opposite IShares Morningstar and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Morningstar 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 iShares Morningstar Small Cap and First Trust Small 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.