Correlation Between Eafe Choice and International Smaller

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

Diversification Opportunities for Eafe Choice and International Smaller

0.85

Correlation Coefficient

Eafe Choice  International Smaller

Very poor diversification

The 3 months correlation between Eafe and International is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding The Eafe Choice 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 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 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 Eafe Choice i.e., Eafe Choice and International Smaller go up and down completely randomly.

Pair Corralation between Eafe Choice and International Smaller

Assuming the 90 days horizon The Eafe Choice is expected to generate 0.9 times more return on investment than International Smaller. However, The Eafe Choice is 1.11 times less risky than International Smaller. It trades about 0.08 of its potential returns per unit of risk. The International Smaller is currently generating about 0.04 per unit of risk. If you would invest  1,399  in The Eafe Choice on December 28, 2024 and sell it today you would earn a total of  65.00  from holding The Eafe Choice or generate 4.65% 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 International Smaller

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 fundamental indicators, Eafe Choice 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

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The International Smaller are ranked lower than 3 (%) 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.

Pair Trading with Eafe Choice and International Smaller

The main advantage of trading using opposite Eafe Choice and International Smaller positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Eafe Choice 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 Eafe Choice 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.