Correlation Between Emerging Markets and Small Cap
Can any of the company-specific risk be diversified away by investing in both Emerging Markets and Small Cap 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 Emerging Markets and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Emerging Markets Fund and Small Cap Growth, you can compare the effects of market volatilities on Emerging Markets and Small Cap 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 Emerging Markets with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Emerging Markets and Small Cap.
Diversification Opportunities for Emerging Markets and Small Cap
-0.56 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Emerging and Small is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets Fund and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Emerging Markets 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 Emerging Markets Fund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Growth has no effect on the direction of Emerging Markets i.e., Emerging Markets and Small Cap go up and down completely randomly.
Pair Corralation between Emerging Markets and Small Cap
Assuming the 90 days horizon Emerging Markets Fund is expected to generate 0.69 times more return on investment than Small Cap. However, Emerging Markets Fund is 1.45 times less risky than Small Cap. It trades about -0.01 of its potential returns per unit of risk. Small Cap Growth is currently generating about -0.27 per unit of risk. If you would invest 1,159 in Emerging Markets Fund on September 25, 2024 and sell it today you would lose (2.00) from holding Emerging Markets Fund or give up 0.17% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Against |
Strength | Very Weak |
Accuracy | 95.24% |
Values | Daily Returns |
Emerging Markets Fund vs. Small Cap Growth
Performance |
Timeline |
Emerging Markets |
Small Cap Growth |
Emerging Markets and Small Cap Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Emerging Markets and Small Cap
The main advantage of trading using opposite Emerging Markets and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerging Markets position performs unexpectedly, Small Cap 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 Small Cap will offset losses from the drop in Small Cap's long position.Emerging Markets vs. International Growth Fund | Emerging Markets vs. Value Fund I | Emerging Markets vs. Heritage Fund I | Emerging Markets vs. Equity Income Fund |
Small Cap vs. Mid Cap Value | Small Cap vs. Equity Growth Fund | Small Cap vs. Income Growth Fund | Small Cap vs. Diversified Bond Fund |
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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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