Correlation Between Northern Lights and First Trust

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

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

Diversification Opportunities for Northern Lights and First Trust

0.91

Correlation Coefficient

Northern Lights  First Trust

Almost no diversification

The 3 months correlation between Northern and First is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and First Trust Exchange Traded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Exchange and Northern Lights 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 Northern Lights 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 Exchange has no effect on the direction of Northern Lights i.e., Northern Lights and First Trust go up and down completely randomly.

Pair Corralation between Northern Lights and First Trust

Given the investment horizon of 90 days Northern Lights is expected to generate 2.63 times less return on investment than First Trust. But when comparing it to its historical volatility, Northern Lights is 1.56 times less risky than First Trust. It trades about 0.13 of its potential returns per unit of risk. First Trust Exchange Traded is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  2,776  in First Trust Exchange Traded on September 14, 2024 and sell it today you would earn a total of  389.00  from holding First Trust Exchange Traded or generate 14.01% return on investment over 90 days.

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

Northern Lights  vs.  First Trust Exchange Traded

Northern Lights

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Northern Lights is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

First Trust Exchange

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating essential indicators, First Trust reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Northern Lights and First Trust

The main advantage of trading using opposite Northern Lights and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Lights 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 Northern Lights and First Trust Exchange Traded 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.