Can any of the company-specific risk be diversified away by investing in both American Funds and Capital World 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 American Funds and Capital World into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American Funds Fundamental and Capital World Growth, you can compare the effects of market volatilities on American Funds and Capital World 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 American Funds with a short position of Capital World. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Capital World.
Diversification Opportunities for American Funds and Capital World
The 3 months correlation between American and Capital is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding American Funds Fundamental and Capital World Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital World Growth and American Funds 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 American Funds Fundamental are associated (or correlated) with Capital World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital World Growth has no effect on the direction of American Funds i.e., American Funds and Capital World go up and down completely randomly.
Pair Corralation between American Funds and Capital World
Assuming the 90 days horizon American Funds Fundamental is expected to generate 1.14 times more return on investment than Capital World. However, American Funds is 1.14 times more volatile than Capital World Growth. It trades about 0.07 of its potential returns per unit of risk. Capital World Growth is currently generating about 0.07 per unit of risk. If you would invest 7,701 in American Funds Fundamental on March 6, 2024 and sell it today you would earn a total of 240.00 from holding American Funds Fundamental or generate 3.12% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Fundamental are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, American Funds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Capital World Growth are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Capital World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.