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 Equity 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
0.59 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Small and EMERGING is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity 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 Equity 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 Equity is expected to generate 1.35 times more return on investment than Emerging Markets. However, Small Cap is 1.35 times more volatile than Emerging Markets Fund. It trades about 0.02 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.02 per unit of risk. If you would invest 1,671 in Small Cap Equity on November 2, 2024 and sell it today you would earn a total of 194.00 from holding Small Cap Equity or generate 11.61% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 99.8% |
| Values | Daily Returns |
Small Cap Equity vs. Emerging Markets Fund
Performance |
| Timeline |
| Small Cap Equity |
| 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. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index |
| Emerging Markets vs. Emerging Markets 2x | Emerging Markets vs. Emerging Markets Leaders | Emerging Markets vs. Emerging Growth Fund | Emerging Markets vs. Mndvux |
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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.
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