Correlation Between Financial Industries and American Funds

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

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

Diversification Opportunities for Financial Industries and American Funds

0.77

Correlation Coefficient

Financial Industries  American Funds

Poor diversification

The 3 months correlation between Financial and American is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Financial Industries Fund and American Funds Fundamental in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Funda and Financial Industries 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 Financial Industries 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 Funda has no effect on the direction of Financial Industries i.e., Financial Industries and American Funds go up and down completely randomly.

Pair Corralation between Financial Industries and American Funds

Assuming the 90 days horizon Financial Industries Fund is expected to under-perform the American Funds. But the mutual fund apears to be less risky and, when comparing its historical volatility, Financial Industries Fund is 1.22 times less risky than American Funds. The mutual fund trades about -0.31 of its potential returns per unit of risk. The American Funds Fundamental is currently generating about -0.16 of returns per unit of risk over similar time horizon. If you would invest  8,893  in American Funds Fundamental on October 9, 2024 and sell it today you would lose (699.00) from holding American Funds Fundamental or give up 7.86% of portfolio value over 90 days.

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

Financial Industries Fund  vs.  American Funds Fundamental

Financial Industries

Risk-Adjusted Performance

0 of 100

Very Weak

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

American Funds Funda

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Funds Fundamental 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 Financial Industries and American Funds

The main advantage of trading using opposite Financial Industries and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Industries 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 Financial Industries Fund and American Funds Fundamental 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.