Correlation Between Stock Index and International Equity
Can any of the company-specific risk be diversified away by investing in both Stock Index and International Equity 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 Stock Index and International Equity into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Stock Index Fund and International Equity Fund, you can compare the effects of market volatilities on Stock Index and International Equity 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 Stock Index with a short position of International Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stock Index and International Equity.
Diversification Opportunities for Stock Index and International Equity
0.85 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Stock and International is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Stock Index Fund and International Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equity and Stock Index 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 Stock Index Fund are associated (or correlated) with International Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equity has no effect on the direction of Stock Index i.e., Stock Index and International Equity go up and down completely randomly.
Pair Corralation between Stock Index and International Equity
Assuming the 90 days horizon Stock Index Fund is expected to generate 1.14 times more return on investment than International Equity. However, Stock Index is 1.14 times more volatile than International Equity Fund. It trades about 0.08 of its potential returns per unit of risk. International Equity Fund is currently generating about 0.05 per unit of risk. If you would invest 3,200 in Stock Index Fund on April 24, 2025 and sell it today you would earn a total of 1,371 from holding Stock Index Fund or generate 42.84% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Stock Index Fund vs. International Equity Fund
Performance |
| Timeline |
| Stock Index Fund |
| International Equity |
Stock Index and International Equity Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Stock Index and International Equity
The main advantage of trading using opposite Stock Index and International Equity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stock Index position performs unexpectedly, International Equity 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 International Equity will offset losses from the drop in International Equity's long position.| Stock Index vs. Value Fund Value | Stock Index vs. Growth Fund Growth | Stock Index vs. International Equity Fund | Stock Index vs. Short Term Bond Fund |
| International Equity vs. Ep Emerging Markets | International Equity vs. Nasdaq 100 2x Strategy | International Equity vs. Siit Emerging Markets | International Equity vs. Rbc Emerging Markets |
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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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