Correlation Between FIRST TRUST and DOW

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Can any of the company-specific risk be diversified away by investing in both FIRST TRUST and DOW 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 DOW into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between FIRST TRUST NSDQ and DOW, you can compare the effects of market volatilities on FIRST TRUST and DOW 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 DOW. Check out your portfolio center. Please also check ongoing floating volatility patterns of FIRST TRUST and DOW.

Diversification Opportunities for FIRST TRUST and DOW

0.57
  Correlation Coefficient

Very weak diversification

The 3 months correlation between FIRST and DOW is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding FIRST TRUST NSDQ CLN EDG GREEN and DOW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DOW 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 NSDQ are associated (or correlated) with DOW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DOW has no effect on the direction of FIRST TRUST i.e., FIRST TRUST and DOW go up and down completely randomly.
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Pair Corralation between FIRST TRUST and DOW

Assuming the 90 days trading horizon FIRST TRUST NSDQ is expected to generate 1.8 times more return on investment than DOW. However, FIRST TRUST is 1.8 times more volatile than DOW. It trades about 0.62 of its potential returns per unit of risk. DOW is currently generating about 0.34 per unit of risk. If you would invest  2,211  in FIRST TRUST NSDQ on May 13, 2022 and sell it today you would earn a total of  578.00  from holding FIRST TRUST NSDQ or generate 26.14% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy95.65%
ValuesDaily Returns

FIRST TRUST NSDQ CLN EDG GREEN  vs.  DOW

 Performance (%) 
       Timeline  

FIRST TRUST and DOW Volatility Contrast

   Predicted Return Density   
       Returns  

FIRST TRUST NSDQ

Pair trading matchups for FIRST TRUST

Alphabet vs. FIRST TRUST
Citigroup vs. FIRST TRUST
Crescent vs. FIRST TRUST
Grayscale Ethereum vs. FIRST TRUST
Twitter vs. FIRST TRUST
Vmware vs. FIRST TRUST
Ford vs. FIRST TRUST
GM vs. FIRST TRUST
Visa vs. FIRST TRUST
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against FIRST TRUST as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. FIRST TRUST's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, FIRST TRUST's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to FIRST TRUST NSDQ.

DOW

Pair trading matchups for DOW

Visa vs. DOW
Grayscale Ethereum vs. DOW
Stmicroelectronics vs. DOW
B of A vs. DOW
Vmware vs. DOW
Microsoft Corp vs. DOW
GM vs. DOW
Twitter vs. DOW
Citigroup vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.

Pair Trading with FIRST TRUST and DOW

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

FIRST TRUST NSDQ

Pair trading matchups for FIRST TRUST

Alphabet vs. FIRST TRUST
Stmicroelectronics vs. FIRST TRUST
Citigroup vs. FIRST TRUST
Twitter vs. FIRST TRUST
Visa vs. FIRST TRUST
Microsoft Corp vs. FIRST TRUST
GM vs. FIRST TRUST
Alphabet vs. FIRST TRUST
Vmware vs. FIRST TRUST
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against FIRST TRUST as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. FIRST TRUST's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, FIRST TRUST's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to FIRST TRUST NSDQ.
The idea behind FIRST TRUST NSDQ and DOW 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.

DOW

Pair trading matchups for DOW

Visa vs. DOW
Citigroup vs. DOW
Twitter vs. DOW
Alphabet vs. DOW
Vmware vs. DOW
GM vs. DOW
Grayscale Ethereum vs. DOW
Alphabet vs. DOW
Microsoft Corp vs. DOW
Stmicroelectronics vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.
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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.

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