Correlation Between Emerging Markets and Eafe Fund

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

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

Diversification Opportunities for Emerging Markets and Eafe Fund

0.5

Correlation Coefficient

Emerging Markets  Eafe Fund

Very weak diversification

The 3 months correlation between Emerging and Eafe is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding The Emerging Markets and The Eafe Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eafe Fund 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 The Emerging Markets are associated (or correlated) with Eafe Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eafe Fund has no effect on the direction of Emerging Markets i.e., Emerging Markets and Eafe Fund go up and down completely randomly.

Pair Corralation between Emerging Markets and Eafe Fund

Assuming the 90 days horizon The Emerging Markets is expected to generate 0.7 times more return on investment than Eafe Fund. However, The Emerging Markets is 1.44 times less risky than Eafe Fund. It trades about 0.09 of its potential returns per unit of risk. The Eafe Fund is currently generating about -0.02 per unit of risk. If you would invest  1,946  in The Emerging Markets on December 26, 2024 and sell it today you would earn a total of  132.00  from holding The Emerging Markets or generate 6.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.36%
Values	Daily Returns

The Emerging Markets  vs.  The Eafe Fund

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 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Emerging Markets may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Eafe Fund

Risk-Adjusted Performance

Very Weak

Over the last 90 days The Eafe Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward-looking signals, Eafe Fund is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Emerging Markets and Eafe Fund

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

The idea behind The Emerging Markets and The Eafe 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.