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
0.35 | Correlation Coefficient |
Weak diversification
The 3 months correlation between Basic and Emerging is 0.35. 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 under-perform the Emerging Markets. In addition to that, Basic Materials is 1.53 times more volatile than Emerging Markets Bond. It trades about -0.2 of its total potential returns per unit of risk. Emerging Markets Bond is currently generating about -0.16 per unit of volatility. If you would invest 5,273 in Emerging Markets Bond on September 15, 2024 and sell it today you would lose (322.00) from holding Emerging Markets Bond or give up 6.11% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| 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. Basic Materials Fund | Basic Materials vs. Basic Materials Fund | Basic Materials vs. Energy Services Fund |
| Emerging Markets vs. Gmo High Yield | Emerging Markets vs. Strategic Advisers Income | Emerging Markets vs. Neuberger Berman Income | Emerging Markets vs. Pax High Yield |
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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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