Correlation Between Emerging Markets and Dfa International

Can any of the company-specific risk be diversified away by investing in both Emerging Markets and Dfa International 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 Dfa International into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Emerging Markets E and Dfa International Small, you can compare the effects of market volatilities on Emerging Markets and Dfa International 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 Dfa International. Check out your portfolio center. Please also check ongoing floating volatility patterns of Emerging Markets and Dfa International.

Diversification Opportunities for Emerging Markets and Dfa International

0.73

Correlation Coefficient

Emerging Markets  Dfa International

Poor diversification

The 3 months correlation between Emerging and Dfa is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets E and Dfa International Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dfa International Small 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 E are associated (or correlated) with Dfa International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dfa International Small has no effect on the direction of Emerging Markets i.e., Emerging Markets and Dfa International go up and down completely randomly.

Pair Corralation between Emerging Markets and Dfa International

Assuming the 90 days horizon Emerging Markets is expected to generate 1.62 times less return on investment than Dfa International. But when comparing it to its historical volatility, Emerging Markets E is 1.21 times less risky than Dfa International. It trades about 0.05 of its potential returns per unit of risk. Dfa International Small is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,244  in Dfa International Small on September 13, 2024 and sell it today you would earn a total of  23.00  from holding Dfa International Small or generate 1.02% return on investment over 90 days.

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

Emerging Markets E  vs.  Dfa International Small

Emerging Markets E

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets E are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Emerging Markets is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Dfa International Small

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dfa International Small has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Dfa International is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Emerging Markets and Dfa International

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

The idea behind Emerging Markets E and Dfa International Small 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.