Correlation Between Technology Select and First Trust

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

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

Diversification Opportunities for Technology Select and First Trust

0.26

Correlation Coefficient

Technology Select  First Trust

Modest diversification

The 3 months correlation between Technology and First is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Technology Select Sector 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 Technology Select 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 Technology Select Sector 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 Technology Select i.e., Technology Select and First Trust go up and down completely randomly.

Pair Corralation between Technology Select and First Trust

Considering the 90-day investment horizon Technology Select Sector is expected to generate 0.64 times more return on investment than First Trust. However, Technology Select Sector is 1.57 times less risky than First Trust. It trades about 0.13 of its potential returns per unit of risk. First Trust Nasdaq is currently generating about 0.02 per unit of risk. If you would invest  21,895  in Technology Select Sector on September 12, 2024 and sell it today you would earn a total of  2,044  from holding Technology Select Sector or generate 9.34% return on investment over 90 days.

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

Technology Select Sector  vs.  First Trust Nasdaq

Technology Select Sector

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Technology Select Sector are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, Technology Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust Nasdaq

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Nasdaq are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, First Trust is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Technology Select and First Trust

The main advantage of trading using opposite Technology Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Technology Select 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 Technology Select Sector 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.