Correlation Between Capital World and American Funds

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

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

Diversification Opportunities for Capital World and American Funds

0.39

Correlation Coefficient

Capital World  American Funds

Weak diversification

The 3 months correlation between Capital and American is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Capital World Bond and American Funds American in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds American 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 Bond 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 American has no effect on the direction of Capital World i.e., Capital World and American Funds go up and down completely randomly.

Pair Corralation between Capital World and American Funds

Assuming the 90 days horizon Capital World Bond is expected to generate 0.47 times more return on investment than American Funds. However, Capital World Bond is 2.14 times less risky than American Funds. It trades about 0.14 of its potential returns per unit of risk. American Funds American is currently generating about 0.04 per unit of risk. If you would invest  1,550  in Capital World Bond on December 30, 2024 and sell it today you would earn a total of  44.00  from holding Capital World Bond or generate 2.84% return on investment over 90 days.

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

Capital World Bond  vs.  American Funds American

Capital World Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Capital World Bond are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Capital World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

American Funds American

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds American are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary 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 Capital World and American Funds

The main advantage of trading using opposite Capital World and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Capital World 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 Capital World Bond and American Funds American 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.