Correlation Between International Equity and International Smaller

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

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

Diversification Opportunities for International Equity and International Smaller

0.96

Correlation Coefficient

International Equity  International Smaller

Almost no diversification

The 3 months correlation between International and International is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding The International Equity and The International Smaller in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The International Smaller and International Equity 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 Equity are associated (or correlated) with International Smaller. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The International Smaller has no effect on the direction of International Equity i.e., International Equity and International Smaller go up and down completely randomly.

Pair Corralation between International Equity and International Smaller

Assuming the 90 days horizon The International Equity is expected to generate 0.74 times more return on investment than International Smaller. However, The International Equity is 1.36 times less risky than International Smaller. It trades about 0.0 of its potential returns per unit of risk. The International Smaller is currently generating about -0.01 per unit of risk. If you would invest  1,393  in The International Equity on September 15, 2024 and sell it today you would earn a total of  0.00  from holding The International Equity or generate 0.0% return on investment over 90 days.

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

The International Equity  vs.  The International Smaller

The International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The International Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, International Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

The International Smaller

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with International Equity and International Smaller

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

The idea behind The International Equity and The International Smaller 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.