Correlation Between Basic Materials and Emerging Markets
Can any of the company-specific risk be diversified away by investing in both Basic Materials 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 Basic Materials and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Basic Materials Fund and Emerging Markets Bond, you can compare the effects of market volatilities on Basic Materials 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 Basic Materials with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Basic Materials and Emerging Markets.
Diversification Opportunities for Basic Materials and Emerging Markets
0.01 | Correlation Coefficient |
Significant diversification
The 3 months correlation between Basic and Emerging is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials Fund and Emerging Markets Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Bond and Basic Materials 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 Basic Materials Fund 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 Bond has no effect on the direction of Basic Materials i.e., Basic Materials and Emerging Markets go up and down completely randomly.
Pair Corralation between Basic Materials and Emerging Markets
Assuming the 90 days horizon Basic Materials Fund is expected to generate 2.08 times more return on investment than Emerging Markets. However, Basic Materials is 2.08 times more volatile than Emerging Markets Bond. It trades about 0.0 of its potential returns per unit of risk. Emerging Markets Bond is currently generating about 0.01 per unit of risk. If you would invest 5,737 in Basic Materials Fund on September 14, 2024 and sell it today you would lose (58.00) from holding Basic Materials Fund or give up 1.01% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 99.63% |
| Values | Daily Returns |
Basic Materials Fund vs. Emerging Markets Bond
Performance |
| Timeline |
| Basic Materials |
| Emerging Markets Bond |
Basic Materials and Emerging Markets Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Basic Materials and Emerging Markets
The main advantage of trading using opposite Basic Materials and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials 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.| Basic Materials vs. Basic Materials Fund | Basic Materials vs. Energy Services Fund | Basic Materials vs. Energy Fund Class | Basic Materials vs. Basic Materials Fund |
| Emerging Markets vs. Basic Materials Fund | Emerging Markets vs. Basic Materials Fund | Emerging Markets vs. Banking Fund Class | Emerging Markets vs. Basic Materials Fund |
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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.
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