Correlation Between IShares MSCI and SPDR Portfolio

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

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

Diversification Opportunities for IShares MSCI and SPDR Portfolio

Almost no diversification

The 3 months correlation between IShares and SPDR is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding IShares MSCI China and SPDR Portfolio Emerging in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR Portfolio Emerging and IShares MSCI 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 IShares MSCI China are associated (or correlated) with SPDR Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR Portfolio Emerging has no effect on the direction of IShares MSCI i.e., IShares MSCI and SPDR Portfolio go up and down completely randomly.

Pair Corralation between IShares MSCI and SPDR Portfolio

Given the investment horizon of 90 days IShares MSCI China is expected to under-perform the SPDR Portfolio. In addition to that, IShares MSCI is 1.7 times more volatile than SPDR Portfolio Emerging. It trades about -0.08 of its total potential returns per unit of risk. SPDR Portfolio Emerging is currently generating about -0.13 per unit of volatility. If you would invest  3,419  in SPDR Portfolio Emerging on June 24, 2023 and sell it today you would lose (75.00) from holding SPDR Portfolio Emerging or give up 2.19% of portfolio value over 90 days.

IShares MSCI China  vs.  SPDR Portfolio Emerging

IShares MSCI China

IShares Performance

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Over the last 90 days IShares MSCI China has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong technical indicators, IShares MSCI is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

SPDR Portfolio Emerging

SPDR Performance

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Over the last 90 days SPDR Portfolio Emerging has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, SPDR Portfolio is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the insiders.

Pair Trading with IShares MSCI and SPDR Portfolio

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

The idea behind IShares MSCI China and SPDR Portfolio Emerging 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.