Correlation Between Blue Chip and Emerging Economies

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

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

Diversification Opportunities for Blue Chip and Emerging Economies

0.97

Correlation Coefficient

Blue Chip  Emerging Economies

Almost no diversification

The 3 months correlation between Blue and Emerging is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Blue Chip Growth and Emerging Economies Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Economies and Blue Chip 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 Blue Chip Growth are associated (or correlated) with Emerging Economies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerging Economies has no effect on the direction of Blue Chip i.e., Blue Chip and Emerging Economies go up and down completely randomly.

Pair Corralation between Blue Chip and Emerging Economies

Assuming the 90 days horizon Blue Chip Growth is expected to generate 1.19 times more return on investment than Emerging Economies. However, Blue Chip is 1.19 times more volatile than Emerging Economies Fund. It trades about 0.33 of its potential returns per unit of risk. Emerging Economies Fund is currently generating about 0.31 per unit of risk. If you would invest  1,654  in Blue Chip Growth on April 26, 2025 and sell it today you would earn a total of  327.00  from holding Blue Chip Growth or generate 19.77% return on investment over 90 days.

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

Blue Chip Growth  vs.  Emerging Economies Fund

Blue Chip Growth

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Blue Chip Growth are ranked lower than 25 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Blue Chip showed solid returns over the last few months and may actually be approaching a breakup point.

Emerging Economies

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Economies Fund are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Emerging Economies showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Blue Chip and Emerging Economies

The main advantage of trading using opposite Blue Chip and Emerging Economies positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Blue Chip position performs unexpectedly, Emerging Economies 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 Economies will offset losses from the drop in Emerging Economies' long position.

The idea behind Blue Chip Growth and Emerging Economies 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.