Correlation Between Emerging Economies and Foreign Value

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

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

Diversification Opportunities for Emerging Economies and Foreign Value

0.95

Correlation Coefficient

Emerging Economies  Foreign Value

Almost no diversification

The 3 months correlation between Emerging and Foreign is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Emerging Economies Fund and Foreign Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Foreign Value and Emerging Economies 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 Emerging Economies Fund are associated (or correlated) with Foreign Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Foreign Value has no effect on the direction of Emerging Economies i.e., Emerging Economies and Foreign Value go up and down completely randomly.

Pair Corralation between Emerging Economies and Foreign Value

Assuming the 90 days horizon Emerging Economies Fund is expected to generate 1.26 times more return on investment than Foreign Value. However, Emerging Economies is 1.26 times more volatile than Foreign Value Fund. It trades about 0.28 of its potential returns per unit of risk. Foreign Value Fund is currently generating about 0.24 per unit of risk. If you would invest  631.00  in Emerging Economies Fund on April 29, 2025 and sell it today you would earn a total of  88.00  from holding Emerging Economies Fund or generate 13.95% return on investment over 90 days.

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

Emerging Economies Fund  vs.  Foreign Value Fund

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 21 (%) 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.

Foreign Value

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Foreign Value Fund are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Foreign Value may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Emerging Economies and Foreign Value

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

The idea behind Emerging Economies Fund and Foreign Value 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.