Correlation Between Tax Managed and Emerging Markets

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Can any of the company-specific risk be diversified away by investing in both Tax Managed 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 Tax Managed and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tax Managed International Equity and Emerging Markets Fund, you can compare the effects of market volatilities on Tax Managed 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 Tax Managed with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Managed and Emerging Markets.

Diversification Opportunities for Tax Managed and Emerging Markets

TaxEmergingDiversified AwayTaxEmergingDiversified Away100%
0.84
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Tax and Emerging is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed International Equi and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Tax Managed 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 Tax Managed International Equity 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 Tax Managed i.e., Tax Managed and Emerging Markets go up and down completely randomly.

Pair Corralation between Tax Managed and Emerging Markets

Assuming the 90 days horizon Tax Managed International Equity is expected to under-perform the Emerging Markets. But the mutual fund apears to be less risky and, when comparing its historical volatility, Tax Managed International Equity is 1.28 times less risky than Emerging Markets. The mutual fund trades about -0.02 of its potential returns per unit of risk. The Emerging Markets Fund is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,627  in Emerging Markets Fund on September 14, 2024 and sell it today you would earn a total of  45.00  from holding Emerging Markets Fund or generate 2.77% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Tax Managed International Equi  vs.  Emerging Markets Fund

 Performance 
JavaScript chart by amCharts 3.21.15OctNov -20246810
JavaScript chart by amCharts 3.21.15RTNAX REMAX
       Timeline  
Tax Managed Internat 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Tax Managed International Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Tax Managed is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15OctNovDecNovDec11.611.711.811.91212.112.212.312.412.5
Emerging Markets 

Risk-Adjusted Performance

3 of 100

 
Weak
 
Strong
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Fund are ranked lower than 3 (%) 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.
JavaScript chart by amCharts 3.21.15OctNovDecNovDec16.216.416.616.81717.217.417.617.8

Tax Managed and Emerging Markets Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-2.41-1.81-1.2-0.60.010.61.211.822.43 0.10.20.30.40.50.6
JavaScript chart by amCharts 3.21.15RTNAX REMAX
       Returns  

Pair Trading with Tax Managed and Emerging Markets

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

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