Correlation Between WisdomTree Emerging and PIMCO RAFI

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

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

Diversification Opportunities for WisdomTree Emerging and PIMCO RAFI

0.85

Correlation Coefficient

WisdomTree Emerging  PIMCO RAFI

Very poor diversification

The 3 months correlation between WisdomTree and PIMCO is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding WisdomTree Emerging Markets and PIMCO RAFI Dynamic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PIMCO RAFI Dynamic and WisdomTree Emerging 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 WisdomTree Emerging Markets are associated (or correlated) with PIMCO RAFI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PIMCO RAFI Dynamic has no effect on the direction of WisdomTree Emerging i.e., WisdomTree Emerging and PIMCO RAFI go up and down completely randomly.

Pair Corralation between WisdomTree Emerging and PIMCO RAFI

Considering the 90-day investment horizon WisdomTree Emerging Markets is expected to generate 1.16 times more return on investment than PIMCO RAFI. However, WisdomTree Emerging is 1.16 times more volatile than PIMCO RAFI Dynamic. It trades about 0.31 of its potential returns per unit of risk. PIMCO RAFI Dynamic is currently generating about 0.25 per unit of risk. If you would invest  4,161  in WisdomTree Emerging Markets on February 13, 2024 and sell it today you would earn a total of  211.00  from holding WisdomTree Emerging Markets or generate 5.07% return on investment over 90 days.

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

WisdomTree Emerging Markets  vs.  PIMCO RAFI Dynamic

WisdomTree Emerging

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree Emerging Markets are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting technical and fundamental indicators, WisdomTree Emerging may actually be approaching a critical reversion point that can send shares even higher in June 2024.

PIMCO RAFI Dynamic

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in PIMCO RAFI Dynamic are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile fundamental indicators, PIMCO RAFI may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with WisdomTree Emerging and PIMCO RAFI

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

The idea behind WisdomTree Emerging Markets and PIMCO RAFI Dynamic 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.