Correlation Between Emerging Markets and Equity Growth

Can any of the company-specific risk be diversified away by investing in both Emerging Markets and Equity Growth 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 Equity Growth 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 Equity Growth Strategy, you can compare the effects of market volatilities on Emerging Markets and Equity Growth 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 Equity Growth. Check out your portfolio center. Please also check ongoing floating volatility patterns of Emerging Markets and Equity Growth.

Diversification Opportunities for Emerging Markets and Equity Growth

-0.1

Correlation Coefficient

Emerging Markets  Equity Growth

Good diversification

The 3 months correlation between Emerging and Equity is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets Fund and Equity Growth Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Growth Strategy 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 Equity Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Growth Strategy has no effect on the direction of Emerging Markets i.e., Emerging Markets and Equity Growth go up and down completely randomly.

Pair Corralation between Emerging Markets and Equity Growth

Assuming the 90 days horizon Emerging Markets Fund is expected to under-perform the Equity Growth. In addition to that, Emerging Markets is 1.76 times more volatile than Equity Growth Strategy. It trades about -0.05 of its total potential returns per unit of risk. Equity Growth Strategy is currently generating about -0.02 per unit of volatility. If you would invest  1,595  in Equity Growth Strategy on September 20, 2024 and sell it today you would lose (17.00) from holding Equity Growth Strategy or give up 1.07% of portfolio value over 90 days.

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

Emerging Markets Fund  vs.  Equity Growth Strategy

Emerging Markets

Risk-Adjusted Performance

0 of 100

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 fairly strong basic indicators, Emerging Markets is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Growth Strategy

Risk-Adjusted Performance

0 of 100

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 basic indicators, Equity Growth 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 Equity Growth

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

The idea behind Emerging Markets Fund and Equity Growth Strategy 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.