Correlation Between American Balanced and American Funds

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

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

Diversification Opportunities for American Balanced and American Funds

0.91

Correlation Coefficient

American Balanced  American Funds

Almost no diversification

The 3 months correlation between American and American is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding American Balanced Fund and American Funds Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Growth and American Balanced 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 Balanced 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 Growth has no effect on the direction of American Balanced i.e., American Balanced and American Funds go up and down completely randomly.

Pair Corralation between American Balanced and American Funds

Assuming the 90 days horizon American Balanced Fund is expected to generate 0.87 times more return on investment than American Funds. However, American Balanced Fund is 1.15 times less risky than American Funds. It trades about -0.02 of its potential returns per unit of risk. American Funds Growth is currently generating about -0.03 per unit of risk. If you would invest  3,426  in American Balanced Fund on December 30, 2024 and sell it today you would lose (27.00) from holding American Balanced Fund or give up 0.79% of portfolio value over 90 days.

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

American Balanced Fund  vs.  American Funds Growth

American Balanced

Risk-Adjusted Performance

Very Weak

Over the last 90 days American Balanced Fund has generated negative risk-adjusted returns adding no value to fund investors. 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.

American Funds Growth

Risk-Adjusted Performance

Very Weak

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.

Pair Trading with American Balanced and American Funds

The main advantage of trading using opposite American Balanced and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Balanced 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 American Balanced Fund and American Funds Growth 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.