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Emulation is one of MacroRisk Analytics’ advanced applications of Eta Analysis. Simply put, since every stock or fund has a specific Eta Profile, our tools can choose a collection of investments to closely match that Eta Profile. In addition, since the prices of most stocks and funds are largely determined by the economy, a portfolio that emulates a particular company will tend to perform similarly to that company. However, stocks tend to be more affected by company-specific details than are portfolios.
This means that you can generally reduce the risk associated with investing in a particular company by investing in a portfolio that emulates that company. In the graph above, you can see that a portfolio emulating Walt Disney Company (in blue) generally tracks the company’s performance very closely. But it’s also exposed to less economic risk: you can see that the blue line is smoother than the pink line. You can also see that the portfolio’s average value is the same as that of DIS, but its minimum and maximum values are both higher.
So rethink your investing strategy: in addition to simply investing in your favorite stocks, lower your economic risk by investing in the portfolios that emulate them. Why does this work? Because in emulation, as in so many other areas being discovered every year, The Economy Matters.