Correlation Between Dfa International and Emerging Markets

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

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

Diversification Opportunities for Dfa International and Emerging Markets

0.73

Correlation Coefficient

Dfa International  Emerging Markets

Poor diversification

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

Pair Corralation between Dfa International and Emerging Markets

Assuming the 90 days horizon Dfa International Small is expected to under-perform the Emerging Markets. But the mutual fund apears to be less risky and, when comparing its historical volatility, Dfa International Small is 1.02 times less risky than Emerging Markets. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Emerging Markets E is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,364  in Emerging Markets E on September 12, 2024 and sell it today you would earn a total of  35.00  from holding Emerging Markets E or generate 1.48% return on investment over 90 days.

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

Dfa International Small  vs.  Emerging Markets E

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.

Emerging Markets E

Risk-Adjusted Performance

2 of 100

Insignificant

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.

Pair Trading with Dfa International and Emerging Markets

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

The idea behind Dfa International Small and Emerging Markets E 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.