Correlation Between IShares MSCI and PIMCO RAFI

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

By analyzing existing cross correlation between iShares MSCI Intl and PIMCO RAFI Dynamic, you can compare the effects of market volatilities on IShares MSCI and PIMCO RAFI 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 IShares MSCI with a short position of PIMCO RAFI. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and PIMCO RAFI.

Diversification Opportunities for IShares MSCI and PIMCO RAFI

0.82

Correlation Coefficient

IShares MSCI  PIMCO RAFI

Very poor diversification

The 3 months correlation between IShares and PIMCO is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI Intl and PIMCO RAFI Dynamic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PIMCO RAFI Dynamic and IShares MSCI 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 iShares MSCI Intl are associated (or correlated) with PIMCO RAFI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PIMCO RAFI Dynamic has no effect on the direction of IShares MSCI i.e., IShares MSCI and PIMCO RAFI go up and down completely randomly.

Pair Corralation between IShares MSCI and PIMCO RAFI

Given the investment horizon of 90 days iShares MSCI Intl is expected to generate 1.24 times more return on investment than PIMCO RAFI. However, IShares MSCI is 1.24 times more volatile than PIMCO RAFI Dynamic. It trades about 0.17 of its potential returns per unit of risk. PIMCO RAFI Dynamic is currently generating about 0.15 per unit of risk. If you would invest  3,836  in iShares MSCI Intl on September 15, 2024 and sell it today you would earn a total of  83.00  from holding iShares MSCI Intl or generate 2.16% return on investment over 90 days.

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

iShares MSCI Intl  vs.  PIMCO RAFI Dynamic

iShares MSCI Intl

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares MSCI Intl has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, IShares MSCI is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

PIMCO RAFI Dynamic

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PIMCO RAFI Dynamic has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, PIMCO RAFI is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with IShares MSCI and PIMCO RAFI

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

The idea behind iShares MSCI Intl and PIMCO RAFI Dynamic 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.