Correlation Between Multifactor Equity and Emerging Markets

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

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

Diversification Opportunities for Multifactor Equity and Emerging Markets

0.98

Correlation Coefficient

Multifactor Equity  Emerging Markets

Almost no diversification

The 3 months correlation between Multifactor and Emerging is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Multifactor Equity 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 Multifactor Equity 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 Multifactor Equity 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 Multifactor Equity i.e., Multifactor Equity and Emerging Markets go up and down completely randomly.

Pair Corralation between Multifactor Equity and Emerging Markets

Assuming the 90 days horizon Multifactor Equity Fund is expected to generate 1.11 times more return on investment than Emerging Markets. However, Multifactor Equity is 1.11 times more volatile than Emerging Markets Fund. It trades about 0.25 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.26 per unit of risk. If you would invest  1,459  in Multifactor Equity Fund on May 2, 2025 and sell it today you would earn a total of  176.00  from holding Multifactor Equity Fund or generate 12.06% return on investment over 90 days.

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

Multifactor Equity Fund  vs.  Emerging Markets Fund

Multifactor Equity

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Multifactor Equity Fund are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Multifactor Equity may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Emerging Markets

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Fund are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Emerging Markets may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Multifactor Equity and Emerging Markets

The main advantage of trading using opposite Multifactor Equity and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Multifactor Equity 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 Multifactor Equity Fund 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.