Can any of the company-specific risk be diversified away by investing in both New World and Brandes Emerging 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 New World and Brandes Emerging into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between New World Fund and Brandes Emerging Markets, you can compare the effects of market volatilities on New World and Brandes Emerging 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 New World with a short position of Brandes Emerging. Check out your portfolio center. Please also check ongoing floating volatility patterns of New World and Brandes Emerging.
Diversification Opportunities for New World and Brandes Emerging
The 3 months correlation between New and Brandes is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding NEW WORLD FUND and BRANDES EMERGING MARKETS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brandes Emerging Markets and New World 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 New World Fund are associated (or correlated) with Brandes Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brandes Emerging Markets has no effect on the direction of New World i.e., New World and Brandes Emerging go up and down completely randomly.
Pair Corralation between New World and Brandes Emerging
Assuming the 90 days horizon New World Fund is expected to generate 0.69 times more return on investment than Brandes Emerging. However, New World Fund is 1.45 times less risky than Brandes Emerging. It trades about 0.37 of its potential returns per unit of risk. Brandes Emerging Markets is currently generating about 0.22 per unit of risk. If you would invest 6,660 in New World Fund on September 3, 2023 and sell it today you would earn a total of 323.00 from holding New World Fund or generate 4.85% return on investment over 90 days.
Over the last 90 days New World Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, New World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Brandes Emerging Markets are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Brandes Emerging is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
New World and Brandes Emerging Volatility Contrast
Predicted Return Density
Pair Trading with New World and Brandes Emerging
The main advantage of trading using opposite New World and Brandes Emerging positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if New World position performs unexpectedly, Brandes Emerging 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 Brandes Emerging will offset losses from the drop in Brandes Emerging's long position.
The idea behind New World Fund and Brandes Emerging Markets 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.
Check out your portfolio center.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.
Analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes
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