Correlation Between Real Estate and Emerging Markets

Can any of the company-specific risk be diversified away by investing in both Real Estate 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 Estate 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 Estate Fund and Emerging Markets Fund, you can compare the effects of market volatilities on Real Estate 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 Estate with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Real Estate and Emerging Markets.

Diversification Opportunities for Real Estate and Emerging Markets

-0.25

Correlation Coefficient

Real Estate  Emerging Markets

Very good diversification

The 3 months correlation between Real and Emerging is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding Real Estate Fund and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Real Estate 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 Estate 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 has no effect on the direction of Real Estate i.e., Real Estate and Emerging Markets go up and down completely randomly.

Pair Corralation between Real Estate and Emerging Markets

Assuming the 90 days horizon Real Estate is expected to generate 1.32 times less return on investment than Emerging Markets. In addition to that, Real Estate is 1.04 times more volatile than Emerging Markets Fund. It trades about 0.05 of its total potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.07 per unit of volatility. If you would invest  1,013  in Emerging Markets Fund on September 19, 2024 and sell it today you would earn a total of  161.00  from holding Emerging Markets Fund or generate 15.89% return on investment over 90 days.

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

Real Estate Fund  vs.  Emerging Markets Fund

Real Estate Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

Emerging Markets

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Emerging Markets Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward 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 Estate and Emerging Markets

The main advantage of trading using opposite Real Estate and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Real Estate 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 Estate Fund and Emerging Markets Fund 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 Anywhere module to track or share privately all of your investments from the convenience of any device.