Correlation Between Dfa International and Emerging Markets

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

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

Diversification Opportunities for Dfa International and Emerging Markets

0.7

Correlation Coefficient

Dfa International  Emerging Markets

Poor diversification

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

Pair Corralation between Dfa International and Emerging Markets

Assuming the 90 days horizon Dfa International is expected to generate 1.18 times less return on investment than Emerging Markets. But when comparing it to its historical volatility, Dfa International is 1.02 times less risky than Emerging Markets. It trades about 0.03 of its potential returns per unit of risk. Emerging Markets Targeted is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  1,058  in Emerging Markets Targeted on September 15, 2024 and sell it today you would earn a total of  76.00  from holding Emerging Markets Targeted or generate 7.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.6%
Values	Daily Returns

Dfa International  vs.  Emerging Markets Targeted

Dfa International

Risk-Adjusted Performance

0 of 100

Very Weak

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

Emerging Markets Targeted

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Dfa International and Emerging Markets

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

The idea behind Dfa International and Emerging Markets Targeted 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.