Correlation Between EM and CMT

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

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

Diversification Opportunities for EM and CMT

0.0

Correlation Coefficient

EM  CMT

Pay attention - limited upside

The 3 months correlation between EM and CMT is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding EM and CMT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CMT and EM 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 EM are associated (or correlated) with CMT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CMT has no effect on the direction of EM i.e., EM and CMT go up and down completely randomly.

Pair Corralation between EM and CMT

If you would invest  0.58  in CMT on August 30, 2024 and sell it today you would earn a total of  0.18  from holding CMT or generate 30.84% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

EM  vs.  CMT

EM

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days EM has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, EM is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

CMT

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CMT are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CMT exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with EM and CMT

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

The idea behind EM and CMT 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.