Correlation Between Emerging Economies and Mid Cap
Can any of the company-specific risk be diversified away by investing in both Emerging Economies and Mid 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 Mid 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 Mid Cap Index, you can compare the effects of market volatilities on Emerging Economies and Mid 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 Mid Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Emerging Economies and Mid Cap.
Diversification Opportunities for Emerging Economies and Mid Cap
0.16 | Correlation Coefficient |
Average diversification
The 3 months correlation between Emerging and Mid is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Economies Fund and Mid Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Index 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 Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Index has no effect on the direction of Emerging Economies i.e., Emerging Economies and Mid Cap go up and down completely randomly.
Pair Corralation between Emerging Economies and Mid Cap
Assuming the 90 days horizon Emerging Economies Fund is expected to under-perform the Mid Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Emerging Economies Fund is 1.52 times less risky than Mid Cap. The mutual fund trades about -0.2 of its potential returns per unit of risk. The Mid Cap Index is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest 2,797 in Mid Cap Index on August 31, 2024 and sell it today you would earn a total of 204.00 from holding Mid Cap Index or generate 7.29% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Emerging Economies Fund vs. Mid Cap Index
Performance |
| Timeline |
| Emerging Economies |
| Mid Cap Index |
Emerging Economies and Mid Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Emerging Economies and Mid Cap
The main advantage of trading using opposite Emerging Economies and Mid Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Emerging Economies position performs unexpectedly, Mid 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 Mid Cap will offset losses from the drop in Mid Cap's long position.The idea behind Emerging Economies Fund and Mid Cap Index 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.
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