Correlation Between Target Retirement and Emerging Markets

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

By analyzing existing cross correlation between Target Retirement 2040 and Emerging Markets Fund, you can compare the effects of market volatilities on Target Retirement 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 Target Retirement with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Target Retirement and Emerging Markets.

Diversification Opportunities for Target Retirement and Emerging Markets

0.39

Correlation Coefficient

Target Retirement  Emerging Markets

Weak diversification

The 3 months correlation between Target and Emerging is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Target Retirement 2040 and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Target Retirement 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 Target Retirement 2040 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 Target Retirement i.e., Target Retirement and Emerging Markets go up and down completely randomly.

Pair Corralation between Target Retirement and Emerging Markets

Assuming the 90 days horizon Target Retirement 2040 is expected to generate 0.57 times more return on investment than Emerging Markets. However, Target Retirement 2040 is 1.74 times less risky than Emerging Markets. It trades about 0.13 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about -0.01 per unit of risk. If you would invest  1,334  in Target Retirement 2040 on September 3, 2024 and sell it today you would earn a total of  57.00  from holding Target Retirement 2040 or generate 4.27% return on investment over 90 days.

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

Target Retirement 2040  vs.  Emerging Markets Fund

Target Retirement 2040

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Target Retirement 2040 are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Target Retirement is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 primary 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 Target Retirement and Emerging Markets

The main advantage of trading using opposite Target Retirement and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Target Retirement 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 Target Retirement 2040 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.