Correlation Between EM and CAPP

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

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

Diversification Opportunities for EM and CAPP

-0.13

Correlation Coefficient

EM  CAPP

Good diversification

The 3 months correlation between EM and CAPP is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding EM and CAPP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CAPP and EM 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 EM are associated (or correlated) with CAPP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CAPP has no effect on the direction of EM i.e., EM and CAPP go up and down completely randomly.

Pair Corralation between EM and CAPP

Assuming the 90 days horizon EM is expected to generate 0.69 times more return on investment than CAPP. However, EM is 1.45 times less risky than CAPP. It trades about -0.08 of its potential returns per unit of risk. CAPP is currently generating about -0.19 per unit of risk. If you would invest  0.08  in EM on January 24, 2024 and sell it today you would lose  0.00  from holding EM or give up 5.6% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

EM  vs.  CAPP

EM

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in EM are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, EM exhibited solid returns over the last few months and may actually be approaching a breakup point.

CAPP

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in CAPP are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, CAPP exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with EM and CAPP

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

The idea behind EM and CAPP 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.