Correlation Between International Smaller and International Developed

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

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

Diversification Opportunities for International Smaller and International Developed

0.7

Correlation Coefficient

International Smaller  International Developed

Poor diversification

The 3 months correlation between International and International is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding The International Smaller and International Developed Market in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Developed and International Smaller 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 International Smaller are associated (or correlated) with International Developed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Developed has no effect on the direction of International Smaller i.e., International Smaller and International Developed go up and down completely randomly.

Pair Corralation between International Smaller and International Developed

Assuming the 90 days horizon International Smaller is expected to generate 3.95 times less return on investment than International Developed. In addition to that, International Smaller is 1.31 times more volatile than International Developed Markets. It trades about 0.03 of its total potential returns per unit of risk. International Developed Markets is currently generating about 0.16 per unit of volatility. If you would invest  4,137  in International Developed Markets on December 27, 2024 and sell it today you would earn a total of  330.00  from holding International Developed Markets or generate 7.98% return on investment over 90 days.

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

The International Smaller  vs.  International Developed Market

The International Smaller

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The International Smaller are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward-looking signals, International Smaller is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

International Developed

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in International Developed Markets are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, International Developed may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with International Smaller and International Developed

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

The idea behind The International Smaller and International Developed 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.