Correlation Between DIA and EM
Can any of the company-specific risk be diversified away by investing in both DIA and EM 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 DIA and EM into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DIA and EM, you can compare the effects of market volatilities on DIA and EM 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 DIA with a short position of EM. Check out your portfolio center. Please also check ongoing floating volatility patterns of DIA and EM.
Diversification Opportunities for DIA and EM
Pay attention - limited upside
The 3 months correlation between DIA and EM is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding DIA and EM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EM and DIA 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 DIA are associated (or correlated) with EM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EM has no effect on the direction of DIA i.e., DIA and EM go up and down completely randomly.
Pair Corralation between DIA and EM
Assuming the 90 days trading horizon DIA is expected to generate 1.14 times more return on investment than EM. However, DIA is 1.14 times more volatile than EM. It trades about 0.07 of its potential returns per unit of risk. EM is currently generating about -0.02 per unit of risk. If you would invest 53.00 in DIA on August 23, 2024 and sell it today you would earn a total of 22.00 from holding DIA or generate 41.51% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Flat |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
DIA vs. EM
Performance |
| Timeline |
| DIA |
| EM |
DIA and EM Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with DIA and EM
The main advantage of trading using opposite DIA and EM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DIA position performs unexpectedly, EM 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 EM will offset losses from the drop in EM's long position.The idea behind DIA and EM 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.
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