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 A 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

0.95

Correlation Coefficient

Value Fund  Emerging Markets

Almost no diversification

The 3 months correlation between Value and Emerging is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Value Fund A 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 A 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 is expected to generate 1.7 times less return on investment than Emerging Markets. In addition to that, Value Fund is 1.05 times more volatile than Emerging Markets Fund. It trades about 0.19 of its total potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.34 per unit of volatility. If you would invest  1,149  in Emerging Markets Fund on April 25, 2025 and sell it today you would earn a total of  184.00  from holding Emerging Markets Fund or generate 16.01% return on investment over 90 days.

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

Value Fund A  vs.  Emerging Markets Fund

Value Fund A

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Value Fund A are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Value Fund may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Emerging Markets

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Fund are ranked lower than 26 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Emerging Markets showed solid returns over the last few months and may actually be approaching a breakup point.

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 A 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.