Can any of the company-specific risk be diversified away by investing in both AMERICAN FUNDS and LIFESTYLE 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 LIFESTYLE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between AMERICAN FUNDS GROWTH and LIFESTYLE II AGGRESSIVE, you can compare the effects of market volatilities on AMERICAN FUNDS and LIFESTYLE 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 LIFESTYLE. Check out your portfolio center. Please also check ongoing floating volatility patterns of AMERICAN FUNDS and LIFESTYLE.
Diversification Opportunities for AMERICAN FUNDS and LIFESTYLE
The 3 months correlation between AMERICAN and LIFESTYLE is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding AMERICAN FUNDS GROWTH and LIFESTYLE II AGGRESSIVE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LIFESTYLE II AGGRESSIVE 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 GROWTH are associated (or correlated) with LIFESTYLE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LIFESTYLE II AGGRESSIVE has no effect on the direction of AMERICAN FUNDS i.e., AMERICAN FUNDS and LIFESTYLE go up and down completely randomly.
Pair Corralation between AMERICAN FUNDS and LIFESTYLE
Assuming the 90 days horizon AMERICAN FUNDS GROWTH is expected to generate 1.09 times more return on investment than LIFESTYLE. However, AMERICAN FUNDS is 1.09 times more volatile than LIFESTYLE II AGGRESSIVE. It trades about -0.04 of its potential returns per unit of risk. LIFESTYLE II AGGRESSIVE is currently generating about -0.07 per unit of risk. If you would invest 2,051 in AMERICAN FUNDS GROWTH on June 28, 2023 and sell it today you would lose (42.00) from holding AMERICAN FUNDS GROWTH or give up 2.05% of portfolio value over 90 days.
Over the last 90 days AMERICAN FUNDS GROWTH has generated negative risk-adjusted returns adding no value to fund investors. 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.
Over the last 90 days LIFESTYLE II AGGRESSIVE has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, LIFESTYLE is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite AMERICAN FUNDS and LIFESTYLE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if AMERICAN FUNDS position performs unexpectedly, LIFESTYLE 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 LIFESTYLE will offset losses from the drop in LIFESTYLE's long position.
The idea behind AMERICAN FUNDS GROWTH and LIFESTYLE II AGGRESSIVE 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.
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