Correlation Between Large Cap and Emerging Markets

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

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

Diversification Opportunities for Large Cap and Emerging Markets

-0.84

Correlation Coefficient

Large Cap  Emerging Markets

Pay attention - limited upside

The 3 months correlation between Large and Emerging is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Growth Profund and Emerging Markets Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Equity and Large Cap 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 Large Cap Growth Profund 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 Equity has no effect on the direction of Large Cap i.e., Large Cap and Emerging Markets go up and down completely randomly.

Pair Corralation between Large Cap and Emerging Markets

Assuming the 90 days horizon Large Cap Growth Profund is expected to generate 1.14 times more return on investment than Emerging Markets. However, Large Cap is 1.14 times more volatile than Emerging Markets Equity. It trades about 0.11 of its potential returns per unit of risk. Emerging Markets Equity is currently generating about 0.02 per unit of risk. If you would invest  2,794  in Large Cap Growth Profund on October 11, 2024 and sell it today you would earn a total of  1,886  from holding Large Cap Growth Profund or generate 67.5% return on investment over 90 days.

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

Large Cap Growth Profund  vs.  Emerging Markets Equity

Large Cap Growth

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Growth Profund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Large Cap may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Emerging Markets Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Emerging Markets Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Large Cap and Emerging Markets

The main advantage of trading using opposite Large Cap and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Cap 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 Large Cap Growth Profund and Emerging Markets Equity 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..