Correlation Between Equity Index and International Equity

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

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

Diversification Opportunities for Equity Index and International Equity

0.67

Correlation Coefficient

Equity Index  International Equity

Poor diversification

The 3 months correlation between EQUITY and International is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Institutional and International Equity Instituti in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equity and Equity Index 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 Equity Index Institutional are associated (or correlated) with International Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equity has no effect on the direction of Equity Index i.e., Equity Index and International Equity go up and down completely randomly.

Pair Corralation between Equity Index and International Equity

Assuming the 90 days horizon Equity Index Institutional is expected to under-perform the International Equity. But the mutual fund apears to be less risky and, when comparing its historical volatility, Equity Index Institutional is 1.23 times less risky than International Equity. The mutual fund trades about -0.07 of its potential returns per unit of risk. The International Equity Institutional is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,525  in International Equity Institutional on December 5, 2024 and sell it today you would lose (36.00) from holding International Equity Institutional or give up 2.36% of portfolio value over 90 days.

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

Equity Index Institutional  vs.  International Equity Instituti

Equity Index Institu

Risk-Adjusted Performance

Very Weak

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

International Equity

Risk-Adjusted Performance

Very Weak

Over the last 90 days International Equity Institutional 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.

Pair Trading with Equity Index and International Equity

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

The idea behind Equity Index Institutional and International Equity Institutional 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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.