Correlation Between Extended Market and Emerging Markets

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

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

Diversification Opportunities for Extended Market and Emerging Markets

0.22

Correlation Coefficient

Extended Market  Emerging Markets

Modest diversification

The 3 months correlation between Extended and Emerging is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Extended Market Index and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Extended Market 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 Extended Market Index 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 Extended Market i.e., Extended Market and Emerging Markets go up and down completely randomly.

Pair Corralation between Extended Market and Emerging Markets

Assuming the 90 days horizon Extended Market Index is expected to generate 0.59 times more return on investment than Emerging Markets. However, Extended Market Index is 1.69 times less risky than Emerging Markets. It trades about -0.32 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about -0.21 per unit of risk. If you would invest  2,515  in Extended Market Index on September 27, 2024 and sell it today you would lose (435.00) from holding Extended Market Index or give up 17.3% of portfolio value over 90 days.

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

Extended Market Index  vs.  Emerging Markets Fund

Extended Market Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extended Market Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Emerging Markets

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Emerging Markets 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 January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Extended Market and Emerging Markets

The main advantage of trading using opposite Extended Market and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Extended Market 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 Extended Market Index 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.