Correlation Between International Equity and Equity Index

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

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

Diversification Opportunities for International Equity and Equity Index

-0.38

Correlation Coefficient

International Equity  Equity Index

Very good diversification

The 3 months correlation between International and Equity is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Instituti and Equity Index Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Index Investor 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 International Equity Institutional are associated (or correlated) with Equity Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Index Investor has no effect on the direction of International Equity i.e., International Equity and Equity Index go up and down completely randomly.

Pair Corralation between International Equity and Equity Index

Assuming the 90 days horizon International Equity Institutional is expected to generate 0.86 times more return on investment than Equity Index. However, International Equity Institutional is 1.16 times less risky than Equity Index. It trades about 0.18 of its potential returns per unit of risk. Equity Index Investor is currently generating about -0.05 per unit of risk. If you would invest  1,371  in International Equity Institutional on December 30, 2024 and sell it today you would earn a total of  136.00  from holding International Equity Institutional or generate 9.92% return on investment over 90 days.

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

International Equity Instituti  vs.  Equity Index Investor

International Equity

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in International Equity Institutional are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, International Equity may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Equity Index Investor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Index Investor 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.

Pair Trading with International Equity and Equity Index

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

The idea behind International Equity Institutional and Equity Index Investor 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.