Correlation Between Strategic Allocation and American Balanced

Can any of the company-specific risk be diversified away by investing in both Strategic Allocation and American Balanced 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 Strategic Allocation and American Balanced into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Strategic Allocation Moderate and American Balanced Fund, you can compare the effects of market volatilities on Strategic Allocation and American Balanced 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 Strategic Allocation with a short position of American Balanced. Check out your portfolio center. Please also check ongoing floating volatility patterns of Strategic Allocation and American Balanced.

Diversification Opportunities for Strategic Allocation and American Balanced

0.99

Correlation Coefficient

Strategic Allocation  American Balanced

No risk reduction

The 3 months correlation between Strategic and American is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Strategic Allocation Moderate and American Balanced Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Balanced and Strategic Allocation 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 Strategic Allocation Moderate are associated (or correlated) with American Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Balanced has no effect on the direction of Strategic Allocation i.e., Strategic Allocation and American Balanced go up and down completely randomly.

Pair Corralation between Strategic Allocation and American Balanced

Assuming the 90 days horizon Strategic Allocation Moderate is expected to under-perform the American Balanced. But the mutual fund apears to be less risky and, when comparing its historical volatility, Strategic Allocation Moderate is 1.06 times less risky than American Balanced. The mutual fund trades about -0.33 of its potential returns per unit of risk. The American Balanced Fund is currently generating about -0.26 of returns per unit of risk over similar time horizon. If you would invest  3,356  in American Balanced Fund on January 20, 2024 and sell it today you would lose (91.00) from holding American Balanced Fund or give up 2.71% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Strategic Allocation Moderate  vs.  American Balanced Fund

Strategic Allocation

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Strategic Allocation Moderate are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Strategic Allocation is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

American Balanced

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American Balanced 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, American Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Strategic Allocation and American Balanced

The main advantage of trading using opposite Strategic Allocation and American Balanced positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Strategic Allocation position performs unexpectedly, American Balanced 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 American Balanced will offset losses from the drop in American Balanced's long position.

The idea behind Strategic Allocation Moderate and American Balanced Fund pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.