Correlation Between Large Cap and Frontier Markets

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

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

Diversification Opportunities for Large Cap and Frontier Markets

-0.4

Correlation Coefficient

Large Cap  Frontier Markets

Very good diversification

The 3 months correlation between Large and Frontier is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Equity and Frontier Markets Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Frontier Markets Por and Large Cap 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 Large Cap Equity are associated (or correlated) with Frontier Markets. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Frontier Markets Por has no effect on the direction of Large Cap i.e., Large Cap and Frontier Markets go up and down completely randomly.

Pair Corralation between Large Cap and Frontier Markets

Assuming the 90 days horizon Large Cap Equity is expected to under-perform the Frontier Markets. In addition to that, Large Cap is 2.09 times more volatile than Frontier Markets Portfolio. It trades about -0.03 of its total potential returns per unit of risk. Frontier Markets Portfolio is currently generating about 0.35 per unit of volatility. If you would invest  1,595  in Frontier Markets Portfolio on September 17, 2024 and sell it today you would earn a total of  47.00  from holding Frontier Markets Portfolio or generate 2.95% return on investment over 90 days.

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

Large Cap Equity  vs.  Frontier Markets Portfolio

Large Cap Equity

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Frontier Markets Por

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Frontier Markets Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Frontier 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 Large Cap and Frontier Markets

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

The idea behind Large Cap Equity and Frontier Markets Portfolio 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..