Correlation Between WisdomTree Europe and WisdomTree Japan

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

By analyzing existing cross correlation between WisdomTree Europe SmallCap and WisdomTree Japan Hedged, you can compare the effects of market volatilities on WisdomTree Europe and WisdomTree Japan 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 WisdomTree Europe with a short position of WisdomTree Japan. Check out your portfolio center. Please also check ongoing floating volatility patterns of WisdomTree Europe and WisdomTree Japan.

Diversification Opportunities for WisdomTree Europe and WisdomTree Japan

0.28

Correlation Coefficient

WisdomTree Europe  WisdomTree Japan

Modest diversification

The 3 months correlation between WisdomTree and WisdomTree is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding WisdomTree Europe SmallCap and WisdomTree Japan Hedged in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree Japan Hedged and WisdomTree Europe 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 WisdomTree Europe SmallCap are associated (or correlated) with WisdomTree Japan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree Japan Hedged has no effect on the direction of WisdomTree Europe i.e., WisdomTree Europe and WisdomTree Japan go up and down completely randomly.

Pair Corralation between WisdomTree Europe and WisdomTree Japan

Considering the 90-day investment horizon WisdomTree Europe SmallCap is expected to generate 1.09 times more return on investment than WisdomTree Japan. However, WisdomTree Europe is 1.09 times more volatile than WisdomTree Japan Hedged. It trades about 0.19 of its potential returns per unit of risk. WisdomTree Japan Hedged is currently generating about -0.01 per unit of risk. If you would invest  5,739  in WisdomTree Europe SmallCap on December 3, 2024 and sell it today you would earn a total of  160.00  from holding WisdomTree Europe SmallCap or generate 2.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

WisdomTree Europe SmallCap  vs.  WisdomTree Japan Hedged

WisdomTree Europe

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree Europe SmallCap are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, WisdomTree Europe is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

WisdomTree Japan Hedged

Risk-Adjusted Performance

Very Weak

Over the last 90 days WisdomTree Japan Hedged has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady basic indicators, WisdomTree Japan is not utilizing all of its potentials. The new stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with WisdomTree Europe and WisdomTree Japan

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

The idea behind WisdomTree Europe SmallCap and WisdomTree Japan Hedged 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.