Correlation Between Basic Materials and Emerging Markets

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

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

Diversification Opportunities for Basic Materials and Emerging Markets

0.78

Correlation Coefficient

Basic Materials  Emerging Markets

Poor diversification

The 3 months correlation between Basic and Emerging is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Emerging Markets Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Bond and Basic Materials 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 Basic Materials 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 Bond has no effect on the direction of Basic Materials i.e., Basic Materials and Emerging Markets go up and down completely randomly.

Pair Corralation between Basic Materials and Emerging Markets

Assuming the 90 days horizon Basic Materials Fund is expected to under-perform the Emerging Markets. In addition to that, Basic Materials is 5.92 times more volatile than Emerging Markets Bond. It trades about -0.13 of its total potential returns per unit of risk. Emerging Markets Bond is currently generating about 0.02 per unit of volatility. If you would invest  4,965  in Emerging Markets Bond on November 28, 2024 and sell it today you would earn a total of  20.00  from holding Emerging Markets Bond or generate 0.4% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.31%
Values	Daily Returns

Basic Materials Fund  vs.  Emerging Markets Bond

Basic Materials

Risk-Adjusted Performance

Very Weak

Over the last 90 days Basic Materials Fund 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 March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Emerging Markets Bond

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Bond are ranked lower than 1 (%) 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 Basic Materials and Emerging Markets

The main advantage of trading using opposite Basic Materials and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials 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 Basic Materials Fund and Emerging Markets Bond 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.