Correlation Between First Trust and Principal Quality

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

By analyzing existing cross correlation between First Trust Emerging and Principal Quality ETF, you can compare the effects of market volatilities on First Trust and Principal Quality 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 Principal Quality. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Principal Quality.

Diversification Opportunities for First Trust and Principal Quality

-0.51

Correlation Coefficient

First Trust  Principal Quality

Excellent diversification

The 3 months correlation between First and Principal is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Emerging and Principal Quality ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Quality ETF 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 Emerging are associated (or correlated) with Principal Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Quality ETF has no effect on the direction of First Trust i.e., First Trust and Principal Quality go up and down completely randomly.

Pair Corralation between First Trust and Principal Quality

Given the investment horizon of 90 days First Trust Emerging is expected to under-perform the Principal Quality. But the etf apears to be less risky and, when comparing its historical volatility, First Trust Emerging is 1.01 times less risky than Principal Quality. The etf trades about -0.11 of its potential returns per unit of risk. The Principal Quality ETF is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  7,040  in Principal Quality ETF on September 23, 2024 and sell it today you would earn a total of  192.00  from holding Principal Quality ETF or generate 2.73% return on investment over 90 days.

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

First Trust Emerging  vs.  Principal Quality ETF

First Trust Emerging

Risk-Adjusted Performance

0 of 100

Very Weak

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

Principal Quality ETF

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Quality ETF are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical and fundamental indicators, Principal Quality is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with First Trust and Principal Quality

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

The idea behind First Trust Emerging and Principal Quality ETF 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.