Correlation Between EM and MTV

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

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

Diversification Opportunities for EM and MTV

0.54

Correlation Coefficient

EM  MTV

Very weak diversification

The 3 months correlation between EM and MTV is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding EM and MTV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MTV 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 MTV. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MTV has no effect on the direction of EM i.e., EM and MTV go up and down completely randomly.

Pair Corralation between EM and MTV

Assuming the 90 days horizon EM is expected to generate 0.35 times more return on investment than MTV. However, EM is 2.88 times less risky than MTV. It trades about -0.04 of its potential returns per unit of risk. MTV is currently generating about -0.1 per unit of risk. If you would invest  0.08  in EM on January 30, 2024 and sell it today you would lose  0.00  from holding EM or give up 2.93% of portfolio value over 90 days.

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

EM  vs.  MTV

EM

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in EM are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, EM may actually be approaching a critical reversion point that can send shares even higher in May 2024.

MTV

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MTV has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, MTV is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with EM and MTV

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

The idea behind EM and MTV 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.