Correlation Between International Equity and Emerging Markets
Can any of the company-specific risk be diversified away by investing in both International Equity 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 International Equity and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between International Equity Portfolio and Emerging Markets Equity, you can compare the effects of market volatilities on International Equity 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 International Equity with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Equity and Emerging Markets.
Diversification Opportunities for International Equity and Emerging Markets
0.67 | Correlation Coefficient |
Poor diversification
The 3 months correlation between International and Emerging is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Portfolio and Emerging Markets Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Equity and International Equity 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 International Equity Portfolio 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 Equity has no effect on the direction of International Equity i.e., International Equity and Emerging Markets go up and down completely randomly.
Pair Corralation between International Equity and Emerging Markets
Assuming the 90 days horizon International Equity Portfolio is expected to generate 0.95 times more return on investment than Emerging Markets. However, International Equity Portfolio is 1.06 times less risky than Emerging Markets. It trades about 0.05 of its potential returns per unit of risk. Emerging Markets Equity is currently generating about 0.04 per unit of risk. If you would invest 1,185 in International Equity Portfolio on September 5, 2024 and sell it today you would earn a total of 250.00 from holding International Equity Portfolio or generate 21.1% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
International Equity Portfolio vs. Emerging Markets Equity
Performance |
| Timeline |
| International Equity |
| Emerging Markets Equity |
International Equity and Emerging Markets Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with International Equity and Emerging Markets
The main advantage of trading using opposite International Equity and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Equity 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.| International Equity vs. Emerging Markets Equity | International Equity vs. Global Fixed Income | International Equity vs. Global Fixed Income | International Equity vs. Global Fixed Income |
| Emerging Markets vs. Qs Large Cap | Emerging Markets vs. Fidelity Series 1000 | Emerging Markets vs. Qs Large Cap | Emerging Markets vs. Aqr Large Cap |
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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.
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