Correlation Between American Funds and Trowe Price

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

By analyzing existing cross correlation between American Funds 2020 and Trowe Price Retirement, you can compare the effects of market volatilities on American Funds and Trowe Price 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 Trowe Price. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Trowe Price.

Diversification Opportunities for American Funds and Trowe Price

0.84

Correlation Coefficient

American Funds  Trowe Price

Very poor diversification

The 3 months correlation between American and Trowe is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding American Funds 2020 and Trowe Price Retirement in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Trowe Price Retirement 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 2020 are associated (or correlated) with Trowe Price. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Trowe Price Retirement has no effect on the direction of American Funds i.e., American Funds and Trowe Price go up and down completely randomly.

Pair Corralation between American Funds and Trowe Price

Assuming the 90 days horizon American Funds is expected to generate 1.99 times less return on investment than Trowe Price. But when comparing it to its historical volatility, American Funds 2020 is 1.1 times less risky than Trowe Price. It trades about 0.06 of its potential returns per unit of risk. Trowe Price Retirement is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  1,916  in Trowe Price Retirement on September 12, 2024 and sell it today you would earn a total of  44.00  from holding Trowe Price Retirement or generate 2.3% return on investment over 90 days.

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

American Funds 2020  vs.  Trowe Price Retirement

American Funds 2020

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds 2020 are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. 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.

Trowe Price Retirement

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Trowe Price Retirement are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Trowe Price 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 Trowe Price

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

The idea behind American Funds 2020 and Trowe Price Retirement 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.