Correlation Between Health Care and American Funds

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Can any of the company-specific risk be diversified away by investing in both Health Care 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 Health Care and American Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Health Care Ultrasector and American Funds Inflation, you can compare the effects of market volatilities on Health Care 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 Health Care with a short position of American Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Health Care and American Funds.

Diversification Opportunities for Health Care and American Funds

HealthAmericanDiversified AwayHealthAmericanDiversified Away100%
0.84
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Health and American is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Health Care Ultrasector and American Funds Inflation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Inflation and Health Care 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 Health Care Ultrasector 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 Inflation has no effect on the direction of Health Care i.e., Health Care and American Funds go up and down completely randomly.

Pair Corralation between Health Care and American Funds

Assuming the 90 days horizon Health Care is expected to generate 1.37 times less return on investment than American Funds. In addition to that, Health Care is 4.07 times more volatile than American Funds Inflation. It trades about 0.05 of its total potential returns per unit of risk. American Funds Inflation is currently generating about 0.29 per unit of volatility. If you would invest  919.00  in American Funds Inflation on November 28, 2024 and sell it today you would earn a total of  14.00  from holding American Funds Inflation or generate 1.52% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Health Care Ultrasector  vs.  American Funds Inflation

 Performance 
JavaScript chart by amCharts 3.21.15Dec2025Feb -6-4-20246
JavaScript chart by amCharts 3.21.15HCPIX FLIBX
       Timeline  
Health Care Ultrasector 

Risk-Adjusted Performance

Weak

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in Health Care Ultrasector are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Health Care is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb9698100102104106108110
American Funds Inflation 

Risk-Adjusted Performance

Modest

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Inflation are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, American Funds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
JavaScript chart by amCharts 3.21.15DecJanFebJanFeb9.059.19.159.29.259.3

Health Care and American Funds Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-3.66-2.74-1.82-0.90.01530.951.912.883.84 12345
JavaScript chart by amCharts 3.21.15HCPIX FLIBX
       Returns  

Pair Trading with Health Care and American Funds

The main advantage of trading using opposite Health Care and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Health Care 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 Health Care Ultrasector and American Funds Inflation 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.

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