Correlation Between World Growth and American Funds

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

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

Diversification Opportunities for World Growth and American Funds

0.94

Correlation Coefficient

World Growth  American Funds

Almost no diversification

The 3 months correlation between World and American is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding World Growth Fund and American Funds Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Income and World Growth 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 World Growth Fund are associated (or correlated) with American Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Funds Income has no effect on the direction of World Growth i.e., World Growth and American Funds go up and down completely randomly.

Pair Corralation between World Growth and American Funds

Assuming the 90 days horizon World Growth Fund is expected to generate 2.03 times more return on investment than American Funds. However, World Growth is 2.03 times more volatile than American Funds Income. It trades about 0.26 of its potential returns per unit of risk. American Funds Income is currently generating about 0.35 per unit of risk. If you would invest  2,813  in World Growth Fund on February 14, 2024 and sell it today you would earn a total of  115.00  from holding World Growth Fund or generate 4.09% return on investment over 90 days.

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

World Growth Fund  vs.  American Funds Income

World Growth

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in World Growth Fund are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, World Growth may actually be approaching a critical reversion point that can send shares even higher in June 2024.

American Funds Income

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Income are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong 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.

Pair Trading with World Growth and American Funds

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

The idea behind World Growth Fund and American Funds Income 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.