Correlation Between International Equity and Diversified International
Can any of the company-specific risk be diversified away by investing in both International Equity and Diversified International 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 Diversified International into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between International Equity Index and Diversified International Fund, you can compare the effects of market volatilities on International Equity and Diversified International 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 Diversified International. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Equity and Diversified International.
Diversification Opportunities for International Equity and Diversified International
0.98 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between International and Diversified is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Index and Diversified International Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified International 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 Index are associated (or correlated) with Diversified International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified International has no effect on the direction of International Equity i.e., International Equity and Diversified International go up and down completely randomly.
Pair Corralation between International Equity and Diversified International
Assuming the 90 days horizon International Equity Index is expected to generate 0.98 times more return on investment than Diversified International. However, International Equity Index is 1.02 times less risky than Diversified International. It trades about 0.33 of its potential returns per unit of risk. Diversified International Fund is currently generating about 0.29 per unit of risk. If you would invest 1,094 in International Equity Index on November 3, 2024 and sell it today you would earn a total of 58.00 from holding International Equity Index or generate 5.3% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
International Equity Index vs. Diversified International Fund
Performance |
| Timeline |
| International Equity |
| Diversified International |
International Equity and Diversified International Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with International Equity and Diversified International
The main advantage of trading using opposite International Equity and Diversified International positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Equity position performs unexpectedly, Diversified International 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 Diversified International will offset losses from the drop in Diversified International's long position.The idea behind International Equity Index and Diversified International 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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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 Stocks Directory module to find actively traded stocks across global markets.
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