Can any of the company-specific risk be diversified away by investing in both American Funds and Prudential Jennison 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 Prudential Jennison into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American Funds American and Prudential Jennison Equity, you can compare the effects of market volatilities on American Funds and Prudential Jennison 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 Prudential Jennison. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Prudential Jennison.
Diversification Opportunities for American Funds and Prudential Jennison
The 3 months correlation between American and Prudential is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding American Funds American and Prudential Jennison Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Jennison 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 American are associated (or correlated) with Prudential Jennison. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Jennison has no effect on the direction of American Funds i.e., American Funds and Prudential Jennison go up and down completely randomly.
Pair Corralation between American Funds and Prudential Jennison
Assuming the 90 days horizon American Funds is expected to generate 1.42 times less return on investment than Prudential Jennison. But when comparing it to its historical volatility, American Funds American is 1.08 times less risky than Prudential Jennison. It trades about 0.09 of its potential returns per unit of risk. Prudential Jennison Equity is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 2,079 in Prudential Jennison Equity on March 6, 2024 and sell it today you would earn a total of 31.00 from holding Prudential Jennison Equity or generate 1.49% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in American Funds American are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary 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 Prudential Jennison Equity are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Prudential Jennison is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.