Correlation Between EM and POCC

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

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

Diversification Opportunities for EM and POCC

0.79

Correlation Coefficient

EM  POCC

Poor diversification

The 3 months correlation between EM and POCC is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding EM and POCC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on POCC 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 POCC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of POCC has no effect on the direction of EM i.e., EM and POCC go up and down completely randomly.

Pair Corralation between EM and POCC

Assuming the 90 days horizon EM is expected to generate 0.87 times more return on investment than POCC. However, EM is 1.15 times less risky than POCC. It trades about -0.08 of its potential returns per unit of risk. POCC is currently generating about -0.16 per unit of risk. If you would invest  0.08  in EM on January 25, 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 Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

EM  vs.  POCC

EM

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in EM are ranked lower than 4 (%) 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.

POCC

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in POCC are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, POCC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with EM and POCC

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

The idea behind EM and POCC 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.