Correlation Between Real Assets and Emerging Markets

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

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

Diversification Opportunities for Real Assets and Emerging Markets

0.54

Correlation Coefficient

Real Assets  Emerging Markets

Very weak diversification

The 3 months correlation between Real and Emerging is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Real Assets Portfolio 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 Real Assets 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 Real Assets Portfolio 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 Real Assets i.e., Real Assets and Emerging Markets go up and down completely randomly.

Pair Corralation between Real Assets and Emerging Markets

Assuming the 90 days horizon Real Assets Portfolio is expected to under-perform the Emerging Markets. But the mutual fund apears to be less risky and, when comparing its historical volatility, Real Assets Portfolio is 1.37 times less risky than Emerging Markets. The mutual fund trades about -0.01 of its potential returns per unit of risk. The Emerging Markets Equity is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,174  in Emerging Markets Equity on September 20, 2024 and sell it today you would earn a total of  163.00  from holding Emerging Markets Equity or generate 13.88% return on investment over 90 days.

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

Real Assets Portfolio  vs.  Emerging Markets Equity

Real Assets Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Real Assets 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.

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 fairly strong basic indicators, Emerging Markets is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Real Assets and Emerging Markets

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

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..