Correlation Between Emerging Markets and International Equity

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

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

Diversification Opportunities for Emerging Markets and International Equity

0.65

Correlation Coefficient

Emerging Markets  International Equity

Poor diversification

The 3 months correlation between Emerging and International is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets Portfolio and International Equity Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equity and Emerging Markets 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 Emerging Markets Portfolio 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 Emerging Markets i.e., Emerging Markets and International Equity go up and down completely randomly.

Pair Corralation between Emerging Markets and International Equity

Assuming the 90 days horizon Emerging Markets Portfolio is expected to generate 0.11 times more return on investment than International Equity. However, Emerging Markets Portfolio is 9.04 times less risky than International Equity. It trades about -0.1 of its potential returns per unit of risk. International Equity Portfolio is currently generating about -0.21 per unit of risk. If you would invest  2,120  in Emerging Markets Portfolio on September 20, 2024 and sell it today you would lose (33.00) from holding Emerging Markets Portfolio or give up 1.56% of portfolio value over 90 days.

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

Emerging Markets Portfolio  vs.  International Equity Portfolio

Emerging Markets Por

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Emerging Markets Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Emerging Markets 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

0 of 100

Very Weak

Over the last 90 days International Equity Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Emerging Markets and International Equity

The main advantage of trading using opposite Emerging Markets and International Equity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerging Markets 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 Emerging Markets Portfolio and International Equity Portfolio 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.

Check out your portfolio center.

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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..