Correlation Between Vanguard Financials and First Trust

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

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

Diversification Opportunities for Vanguard Financials and First Trust

0.99

Correlation Coefficient

Vanguard Financials  First Trust

No risk reduction

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

Pair Corralation between Vanguard Financials and First Trust

Considering the 90-day investment horizon Vanguard Financials is expected to generate 1.31 times less return on investment than First Trust. But when comparing it to its historical volatility, Vanguard Financials Index is 1.68 times less risky than First Trust. It trades about 0.18 of its potential returns per unit of risk. First Trust Nasdaq is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,963  in First Trust Nasdaq on August 30, 2024 and sell it today you would earn a total of  545.00  from holding First Trust Nasdaq or generate 18.39% return on investment over 90 days.

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

Vanguard Financials Index  vs.  First Trust Nasdaq

Vanguard Financials Index

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain technical and fundamental indicators, Vanguard Financials demonstrated solid returns over the last few months and may actually be approaching a breakup point.

First Trust Nasdaq

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Nasdaq are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, First Trust displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Financials and First Trust

The main advantage of trading using opposite Vanguard Financials and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Financials 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 Vanguard Financials Index and First Trust Nasdaq 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.