Correlation Between Dfa Large and Emerging Markets

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

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

Diversification Opportunities for Dfa Large and Emerging Markets

0.6

Correlation Coefficient

Dfa Large  Emerging Markets

Poor diversification

The 3 months correlation between Dfa and Emerging is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Dfa Large and Emerging Markets Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets Small and Dfa Large 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 Dfa Large 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 Small has no effect on the direction of Dfa Large i.e., Dfa Large and Emerging Markets go up and down completely randomly.

Pair Corralation between Dfa Large and Emerging Markets

Assuming the 90 days horizon Dfa Large is expected to generate 1.28 times more return on investment than Emerging Markets. However, Dfa Large is 1.28 times more volatile than Emerging Markets Small. It trades about 0.08 of its potential returns per unit of risk. Emerging Markets Small is currently generating about 0.06 per unit of risk. If you would invest  2,686  in Dfa Large on February 14, 2025 and sell it today you would earn a total of  1,207  from holding Dfa Large or generate 44.94% return on investment over 90 days.

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

Dfa Large  vs.  Emerging Markets Small

Dfa Large

Risk-Adjusted Performance

Very Weak

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

Emerging Markets Small

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Small are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic 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 Dfa Large and Emerging Markets

The main advantage of trading using opposite Dfa Large and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dfa Large 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 Dfa Large and Emerging Markets Small 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..