Correlation Between Emerging Economies and Broad Cap
Can any of the company-specific risk be diversified away by investing in both Emerging Economies and Broad Cap 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 Emerging Economies and Broad Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Emerging Economies Fund and Broad Cap Value, you can compare the effects of market volatilities on Emerging Economies and Broad Cap 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 Emerging Economies with a short position of Broad Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Emerging Economies and Broad Cap.
Diversification Opportunities for Emerging Economies and Broad Cap
0.2 | Correlation Coefficient |
Modest diversification
The 3 months correlation between Emerging and Broad is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Economies Fund and Broad Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Broad Cap Value and Emerging Economies 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 Emerging Economies Fund are associated (or correlated) with Broad Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Broad Cap Value has no effect on the direction of Emerging Economies i.e., Emerging Economies and Broad Cap go up and down completely randomly.
Pair Corralation between Emerging Economies and Broad Cap
Assuming the 90 days horizon Emerging Economies is expected to generate 1.69 times less return on investment than Broad Cap. In addition to that, Emerging Economies is 1.16 times more volatile than Broad Cap Value. It trades about 0.04 of its total potential returns per unit of risk. Broad Cap Value is currently generating about 0.09 per unit of volatility. If you would invest 1,183 in Broad Cap Value on August 31, 2024 and sell it today you would earn a total of 426.00 from holding Broad Cap Value or generate 36.01% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Emerging Economies Fund vs. Broad Cap Value
Performance |
| Timeline |
| Emerging Economies |
| Broad Cap Value |
Emerging Economies and Broad Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Emerging Economies and Broad Cap
The main advantage of trading using opposite Emerging Economies and Broad Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerging Economies position performs unexpectedly, Broad Cap 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 Broad Cap will offset losses from the drop in Broad Cap's long position.The idea behind Emerging Economies Fund and Broad Cap Value 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.
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