Correlation Between Eafe Choice and Emerging Markets

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

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

Diversification Opportunities for Eafe Choice and Emerging Markets

0.88

Correlation Coefficient

Eafe Choice  Emerging Markets

Very poor diversification

The 3 months correlation between Eafe and Emerging is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding The Eafe Choice and The Emerging Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Eafe Choice 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 The Eafe Choice 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 Eafe Choice i.e., Eafe Choice and Emerging Markets go up and down completely randomly.

Pair Corralation between Eafe Choice and Emerging Markets

Assuming the 90 days horizon Eafe Choice is expected to generate 1.62 times less return on investment than Emerging Markets. But when comparing it to its historical volatility, The Eafe Choice is 1.25 times less risky than Emerging Markets. It trades about 0.08 of its potential returns per unit of risk. The Emerging Markets is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,950  in The Emerging Markets on December 29, 2024 and sell it today you would earn a total of  148.00  from holding The Emerging Markets or generate 7.59% return on investment over 90 days.

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

The Eafe Choice  vs.  The Emerging Markets

Eafe Choice

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Eafe Choice are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Eafe Choice 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

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Emerging Markets are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak essential indicators, Emerging Markets may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Eafe Choice and Emerging Markets

The main advantage of trading using opposite Eafe Choice and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Eafe Choice 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 The Eafe Choice and The Emerging Markets 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 CEOs Directory module to screen CEOs from public companies around the world.