Correlation Between Balanced Strategy and Emerging Markets

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

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

Diversification Opportunities for Balanced Strategy and Emerging Markets

0.42

Correlation Coefficient

Balanced Strategy  Emerging Markets

Very weak diversification

The 3 months correlation between Balanced and Emerging is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Balanced Strategy Fund 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 Balanced Strategy 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 Balanced Strategy Fund 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 Balanced Strategy i.e., Balanced Strategy and Emerging Markets go up and down completely randomly.

Pair Corralation between Balanced Strategy and Emerging Markets

Assuming the 90 days horizon Balanced Strategy is expected to generate 14.21 times less return on investment than Emerging Markets. But when comparing it to its historical volatility, Balanced Strategy Fund is 1.79 times less risky than Emerging Markets. It trades about 0.01 of its potential returns per unit of risk. Emerging Markets Equity is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  962.00  in Emerging Markets Equity on December 22, 2024 and sell it today you would earn a total of  37.00  from holding Emerging Markets Equity or generate 3.85% return on investment over 90 days.

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

Balanced Strategy Fund  vs.  Emerging Markets Equity

Balanced Strategy

Risk-Adjusted Performance

Very Weak

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

Emerging Markets Equity

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Equity are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. 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 Balanced Strategy and Emerging Markets

The main advantage of trading using opposite Balanced Strategy and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Balanced Strategy 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 Balanced Strategy Fund 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 Commodity Directory module to find actively traded commodities issued by global exchanges.