Correlation Between Emerging Markets and Focused International

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

Diversification Opportunities for Emerging Markets and Focused International

0.8

Correlation Coefficient

Emerging Markets  Focused International

Very poor diversification

The 3 months correlation between Emerging and Focused is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets Fund and Focused International Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Focused International 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 Focused International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Focused International has no effect on the direction of Emerging Markets i.e., Emerging Markets and Focused International go up and down completely randomly.

Pair Corralation between Emerging Markets and Focused International

Assuming the 90 days horizon Emerging Markets Fund is expected to generate 1.02 times more return on investment than Focused International. However, Emerging Markets is 1.02 times more volatile than Focused International Growth. It trades about 0.04 of its potential returns per unit of risk. Focused International Growth is currently generating about 0.03 per unit of risk. If you would invest  982.00  in Emerging Markets Fund on September 21, 2024 and sell it today you would earn a total of  158.00  from holding Emerging Markets Fund or generate 16.09% return on investment over 90 days.

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

Emerging Markets Fund  vs.  Focused International Growth

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

Focused International

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Focused International Growth has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Emerging Markets and Focused International

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

The idea behind Emerging Markets Fund and Focused International Growth 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.