Can any of the company-specific risk be diversified away by investing in both New Perspective and New Economy 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 New Perspective and New Economy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between New Perspective Fund and New Economy Fund, you can compare the effects of market volatilities on New Perspective and New Economy 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 New Perspective with a short position of New Economy. Check out your portfolio center. Please also check ongoing floating volatility patterns of New Perspective and New Economy.
Diversification Opportunities for New Perspective and New Economy
The 3 months correlation between New and New is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding New Perspective Fund and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund and New Perspective 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 New Perspective Fund are associated (or correlated) with New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of New Perspective i.e., New Perspective and New Economy go up and down completely randomly.
Pair Corralation between New Perspective and New Economy
Assuming the 90 days horizon New Perspective is expected to generate 1.11 times less return on investment than New Economy. But when comparing it to its historical volatility, New Perspective Fund is 1.05 times less risky than New Economy. It trades about 0.07 of its potential returns per unit of risk. New Economy Fund is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 3,657 in New Economy Fund on March 6, 2024 and sell it today you would earn a total of 1,563 from holding New Economy Fund or generate 42.74% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in New Perspective Fund 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, New Perspective 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 New Economy Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, New Economy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.