Correlation Between Eafe Fund and Emerging Markets

Can any of the company-specific risk be diversified away by investing in both Eafe Fund 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 Fund 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 Fund and The Emerging Markets, you can compare the effects of market volatilities on Eafe Fund 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 Fund with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Eafe Fund and Emerging Markets.

Diversification Opportunities for Eafe Fund and Emerging Markets

0.59

Correlation Coefficient

Eafe Fund  Emerging Markets

Very weak diversification

The 3 months correlation between Eafe and Emerging is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding The Eafe Fund 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 Fund 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 Fund 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 Fund i.e., Eafe Fund and Emerging Markets go up and down completely randomly.

Pair Corralation between Eafe Fund and Emerging Markets

Assuming the 90 days horizon Eafe Fund is expected to generate 2.34 times less return on investment than Emerging Markets. In addition to that, Eafe Fund is 1.19 times more volatile than The Emerging Markets. It trades about 0.04 of its total potential returns per unit of risk. The Emerging Markets is currently generating about 0.1 per unit of volatility. 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	Weak
Accuracy	100.0%
Values	Daily Returns

The Eafe Fund  vs.  The Emerging Markets

Eafe Fund

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Eafe Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Eafe Fund 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 Fund and Emerging Markets

The main advantage of trading using opposite Eafe Fund and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Eafe Fund 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 Fund 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.