Correlation Between American Funds and Principal Lifetime

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

By analyzing existing cross correlation between American Funds 2050 and Principal Lifetime 2050, you can compare the effects of market volatilities on American Funds and Principal Lifetime 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 Principal Lifetime. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Principal Lifetime.

Diversification Opportunities for American Funds and Principal Lifetime

0.85

Correlation Coefficient

American Funds  Principal Lifetime

Very poor diversification

The 3 months correlation between American and Principal is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding American Funds 2050 and Principal Lifetime 2050 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Lifetime 2050 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 2050 are associated (or correlated) with Principal Lifetime. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Lifetime 2050 has no effect on the direction of American Funds i.e., American Funds and Principal Lifetime go up and down completely randomly.

Pair Corralation between American Funds and Principal Lifetime

Assuming the 90 days horizon American Funds 2050 is expected to generate 0.92 times more return on investment than Principal Lifetime. However, American Funds 2050 is 1.08 times less risky than Principal Lifetime. It trades about 0.06 of its potential returns per unit of risk. Principal Lifetime 2050 is currently generating about 0.03 per unit of risk. If you would invest  1,919  in American Funds 2050 on October 7, 2024 and sell it today you would earn a total of  174.00  from holding American Funds 2050 or generate 9.07% return on investment over 90 days.

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

American Funds 2050  vs.  Principal Lifetime 2050

American Funds 2050

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Funds 2050 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, American Funds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Principal Lifetime 2050

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Principal Lifetime 2050 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Principal Lifetime is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with American Funds and Principal Lifetime

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

The idea behind American Funds 2050 and Principal Lifetime 2050 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.

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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.