Correlation Between Capital World and Global Quality

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Can any of the company-specific risk be diversified away by investing in both Capital World and Global Quality 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 Capital World and Global Quality into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Capital World Growth and Global Quality Portfolio, you can compare the effects of market volatilities on Capital World and Global Quality 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 Capital World with a short position of Global Quality. Check out your portfolio center. Please also check ongoing floating volatility patterns of Capital World and Global Quality.

Diversification Opportunities for Capital World and Global Quality

0.92
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Capital and Global is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding CAPITAL WORLD GROWTH and GLOBAL QUALITY PORTFOLIO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Global Quality Portfolio and Capital World 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 Capital World Growth are associated (or correlated) with Global Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Global Quality Portfolio has no effect on the direction of Capital World i.e., Capital World and Global Quality go up and down completely randomly.

Pair Corralation between Capital World and Global Quality

Assuming the 90 days horizon Capital World Growth is expected to generate 1.02 times more return on investment than Global Quality. However, Capital World is 1.02 times more volatile than Global Quality Portfolio. It trades about 0.25 of its potential returns per unit of risk. Global Quality Portfolio is currently generating about -0.09 per unit of risk. If you would invest  6,192  in Capital World Growth on December 29, 2023 and sell it today you would earn a total of  214.00  from holding Capital World Growth or generate 3.46% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy95.65%
ValuesDaily Returns

CAPITAL WORLD GROWTH  vs.  GLOBAL QUALITY PORTFOLIO

 Performance 
       Timeline  
Capital World Growth 

Risk-Adjusted Performance

15 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Capital World Growth are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Capital World may actually be approaching a critical reversion point that can send shares even higher in April 2024.
Global Quality Portfolio 

Risk-Adjusted Performance

9 of 100

 
Low
 
High
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Global Quality Portfolio are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong essential indicators, Global Quality is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Capital World and Global Quality Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Capital World and Global Quality

The main advantage of trading using opposite Capital World and Global Quality positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Capital World position performs unexpectedly, Global Quality 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 Global Quality will offset losses from the drop in Global Quality's long position.
The idea behind Capital World Growth and Global Quality Portfolio 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.

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