Correlation Between International Equity and Emerging Markets

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

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

Diversification Opportunities for International Equity and Emerging Markets

0.68

Correlation Coefficient

International Equity  Emerging Markets

Poor diversification

The 3 months correlation between International and Emerging is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Portfolio and Emerging Markets Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Por 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 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 Por has no effect on the direction of International Equity i.e., International Equity and Emerging Markets go up and down completely randomly.

Pair Corralation between International Equity and Emerging Markets

Assuming the 90 days horizon International Equity Portfolio is expected to under-perform the Emerging Markets. In addition to that, International Equity is 8.75 times more volatile than Emerging Markets Portfolio. It trades about -0.22 of its total potential returns per unit of risk. Emerging Markets Portfolio is currently generating about -0.06 per unit of volatility. If you would invest  2,195  in Emerging Markets Portfolio on September 24, 2024 and sell it today you would lose (21.00) from holding Emerging Markets Portfolio or give up 0.96% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

International Equity Portfolio  vs.  Emerging Markets Portfolio

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.

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 latest weak performance, the Fund's primary 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 International Equity and Emerging Markets

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

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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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.