Correlation Between Small Cap and Emerging Markets
Can any of the company-specific risk be diversified away by investing in both Small Cap 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 Small Cap and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Value and Emerging Markets Fund, you can compare the effects of market volatilities on Small Cap 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 Small Cap with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Emerging Markets.
Diversification Opportunities for Small Cap and Emerging Markets
-0.01 | Correlation Coefficient |
Good diversification
The 3 months correlation between Small and Emerging is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Small Cap 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 Small Cap Value 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 Small Cap i.e., Small Cap and Emerging Markets go up and down completely randomly.
Pair Corralation between Small Cap and Emerging Markets
Assuming the 90 days horizon Small Cap Value is expected to generate 2.04 times more return on investment than Emerging Markets. However, Small Cap is 2.04 times more volatile than Emerging Markets Fund. It trades about 0.23 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about -0.13 per unit of risk. If you would invest 1,102 in Small Cap Value on August 31, 2024 and sell it today you would earn a total of 95.00 from holding Small Cap Value or generate 8.62% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Value vs. Emerging Markets Fund
Performance |
| Timeline |
| Small Cap Value |
| Emerging Markets |
Small Cap and Emerging Markets Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Emerging Markets
The main advantage of trading using opposite Small Cap and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap 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.| Small Cap vs. Value Fund Investor | Small Cap vs. Small Pany Fund | Small Cap vs. Mid Cap Value | Small Cap vs. Equity Income Fund |
| Emerging Markets vs. Heritage Fund Investor | Emerging Markets vs. Real Estate Fund | Emerging Markets vs. Global Growth Fund | Emerging Markets vs. Utilities Fund Investor |
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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.
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