Correlation Between Value Fund and Emerging Markets

Can any of the company-specific risk be diversified away by investing in both Value Fund 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 Value Fund and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Value Fund I and Emerging Markets Fund, you can compare the effects of market volatilities on Value Fund 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 Value Fund with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Value Fund and Emerging Markets.

Diversification Opportunities for Value Fund and Emerging Markets

0.87

Correlation Coefficient

Value Fund  Emerging Markets

Very poor diversification

The 3 months correlation between Value and Emerging is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Value Fund I and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Value Fund 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 Value Fund I 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 Value Fund i.e., Value Fund and Emerging Markets go up and down completely randomly.

Pair Corralation between Value Fund and Emerging Markets

Assuming the 90 days horizon Value Fund I is expected to under-perform the Emerging Markets. But the mutual fund apears to be less risky and, when comparing its historical volatility, Value Fund I is 1.05 times less risky than Emerging Markets. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Emerging Markets Fund is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,110  in Emerging Markets Fund on January 14, 2025 and sell it today you would lose (21.00) from holding Emerging Markets Fund or give up 1.89% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Value Fund I  vs.  Emerging Markets Fund

Value Fund I

Risk-Adjusted Performance

Very Weak

Over the last 90 days Value Fund I has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Value Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Emerging Markets

Risk-Adjusted Performance

Very Weak

Over the last 90 days Emerging Markets Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Emerging Markets is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Value Fund and Emerging Markets

The main advantage of trading using opposite Value Fund and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Value Fund 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.

The idea behind Value Fund I and Emerging Markets Fund 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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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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.