Correlation Between Equity Income and Emerging Markets

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

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

Diversification Opportunities for Equity Income and Emerging Markets

0.95

Correlation Coefficient

Equity Income  Emerging Markets

Almost no diversification

The 3 months correlation between Equity and Emerging is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income 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 Equity Income 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 Equity Income 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 Equity Income i.e., Equity Income and Emerging Markets go up and down completely randomly.

Pair Corralation between Equity Income and Emerging Markets

Assuming the 90 days horizon Equity Income is expected to generate 2.13 times less return on investment than Emerging Markets. But when comparing it to its historical volatility, Equity Income Fund is 1.16 times less risky than Emerging Markets. It trades about 0.21 of its potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.39 of returns per unit of risk over similar time horizon. If you would invest  1,100  in Emerging Markets Fund on April 20, 2025 and sell it today you would earn a total of  217.00  from holding Emerging Markets Fund or generate 19.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.41%
Values	Daily Returns

Equity Income Fund  vs.  Emerging Markets Fund

Equity Income

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Equity Income 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 30 (%) 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 Equity Income and Emerging Markets

The main advantage of trading using opposite Equity Income and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Income 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 Equity Income 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.