Correlation Between Emerging Markets and International Developed

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

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

Diversification Opportunities for Emerging Markets and International Developed

0.93

Correlation Coefficient

Emerging Markets  International Developed

Almost no diversification

The 3 months correlation between Emerging and International is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets Fund and International Developed Market in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Developed 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 Fund are associated (or correlated) with International Developed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Developed has no effect on the direction of Emerging Markets i.e., Emerging Markets and International Developed go up and down completely randomly.

Pair Corralation between Emerging Markets and International Developed

Assuming the 90 days horizon Emerging Markets is expected to generate 1.66 times less return on investment than International Developed. In addition to that, Emerging Markets is 1.17 times more volatile than International Developed Markets. It trades about 0.09 of its total potential returns per unit of risk. International Developed Markets is currently generating about 0.18 per unit of volatility. If you would invest  4,129  in International Developed Markets on December 25, 2024 and sell it today you would earn a total of  358.00  from holding International Developed Markets or generate 8.67% return on investment over 90 days.

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

Emerging Markets Fund  vs.  International Developed Market

Emerging Markets

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Fund are ranked lower than 7 (%) 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.

International Developed

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in International Developed Markets are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, International Developed may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Emerging Markets and International Developed

The main advantage of trading using opposite Emerging Markets and International Developed positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerging Markets position performs unexpectedly, International Developed 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 Developed will offset losses from the drop in International Developed's long position.

The idea behind Emerging Markets Fund and International Developed Markets 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.