Correlation Between Short-term Government and Emerging Markets
Can any of the company-specific risk be diversified away by investing in both Short-term Government 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 Short-term Government and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Short Term Government Fund and Emerging Markets Fund, you can compare the effects of market volatilities on Short-term Government 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 Short-term Government with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Government and Emerging Markets.
Diversification Opportunities for Short-term Government and Emerging Markets
-0.2 | Correlation Coefficient |
Good diversification
The 3 months correlation between Short-term and Emerging is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Short-term Government 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 Short Term Government 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 has no effect on the direction of Short-term Government i.e., Short-term Government and Emerging Markets go up and down completely randomly.
Pair Corralation between Short-term Government and Emerging Markets
Assuming the 90 days horizon Short-term Government is expected to generate 8.57 times less return on investment than Emerging Markets. But when comparing it to its historical volatility, Short Term Government Fund is 10.14 times less risky than Emerging Markets. It trades about 0.06 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest 1,138 in Emerging Markets Fund on November 3, 2024 and sell it today you would earn a total of 10.00 from holding Emerging Markets Fund or generate 0.88% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Short Term Government Fund vs. Emerging Markets Fund
Performance |
| Timeline |
| Short Term Government |
| Emerging Markets |
Short-term Government and Emerging Markets Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Short-term Government and Emerging Markets
The main advantage of trading using opposite Short-term Government and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short-term Government 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.| Short-term Government vs. Gmo Quality Fund | Short-term Government vs. Diversified Income Fund | Short-term Government vs. Tax Managed Mid Small | Short-term Government vs. Lord Abbett Diversified |
| Emerging Markets vs. International Growth Fund | Emerging Markets vs. Value Fund I | Emerging Markets vs. Mfs International New | Emerging Markets vs. Heritage Fund I |
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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.
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