Correlation Between Equity Growth and Emerging Markets

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Can any of the company-specific risk be diversified away by investing in both Equity Growth 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 Equity Growth and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Equity Growth Strategy and Emerging Markets Fund, you can compare the effects of market volatilities on Equity Growth 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 Equity Growth with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Growth and Emerging Markets.

Diversification Opportunities for Equity Growth and Emerging Markets

EquityEmergingDiversified AwayEquityEmergingDiversified Away100%
0.0
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between Equity and Emerging is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Equity Growth Strategy and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Equity Growth 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 Equity Growth Strategy 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 has no effect on the direction of Equity Growth i.e., Equity Growth and Emerging Markets go up and down completely randomly.

Pair Corralation between Equity Growth and Emerging Markets

Assuming the 90 days horizon Equity Growth Strategy is expected to generate 0.66 times more return on investment than Emerging Markets. However, Equity Growth Strategy is 1.51 times less risky than Emerging Markets. It trades about -0.01 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about -0.14 per unit of risk. If you would invest  1,331  in Equity Growth Strategy on October 1, 2024 and sell it today you would lose (8.00) from holding Equity Growth Strategy or give up 0.6% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionFlat 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Equity Growth Strategy  vs.  Emerging Markets Fund

 Performance 
JavaScript chart by amCharts 3.21.15OctNovDec -6-4-2024
JavaScript chart by amCharts 3.21.15RELCX REMCX
       Timeline  
Equity Growth Strategy 

Risk-Adjusted Performance

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Weak
 
Strong
Very Weak
Over the last 90 days Equity Growth Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Equity Growth is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15NovDecDec13.113.213.313.413.513.6
Emerging Markets 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Emerging Markets Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.
JavaScript chart by amCharts 3.21.15NovDecDec14.51515.516

Equity Growth and Emerging Markets Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-2.0-1.5-1.0-0.5-0.0250.450.951.451.952.45 0.20.40.60.81.01.2
JavaScript chart by amCharts 3.21.15RELCX REMCX
       Returns  

Pair Trading with Equity Growth and Emerging Markets

The main advantage of trading using opposite Equity Growth and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Growth 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 Equity Growth Strategy and Emerging Markets Fund 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 Global Correlations module to find global opportunities by holding instruments from different markets.

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