Correlation Between Emerging Markets and Real Assets

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

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

Diversification Opportunities for Emerging Markets and Real Assets

0.72

Correlation Coefficient

Emerging Markets  Real Assets

Poor diversification

The 3 months correlation between Emerging and Real is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Markets Equity and Real Assets Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Assets Portfolio 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 Equity are associated (or correlated) with Real Assets. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Assets Portfolio has no effect on the direction of Emerging Markets i.e., Emerging Markets and Real Assets go up and down completely randomly.

Pair Corralation between Emerging Markets and Real Assets

Assuming the 90 days horizon Emerging Markets Equity is expected to under-perform the Real Assets. In addition to that, Emerging Markets is 1.55 times more volatile than Real Assets Portfolio. It trades about -0.26 of its total potential returns per unit of risk. Real Assets Portfolio is currently generating about -0.02 per unit of volatility. If you would invest  1,121  in Real Assets Portfolio on September 5, 2024 and sell it today you would lose (3.00) from holding Real Assets Portfolio or give up 0.27% of portfolio value over 90 days.

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

Emerging Markets Equity  vs.  Real Assets Portfolio

Emerging Markets Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Emerging Markets Equity has generated negative risk-adjusted returns adding no value to fund investors. 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.

Real Assets Portfolio

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Real Assets Portfolio are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Real Assets is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Emerging Markets and Real Assets

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

The idea behind Emerging Markets Equity and Real Assets Portfolio 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.