Correlation Between Smallcap Growth and American Funds

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

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

Diversification Opportunities for Smallcap Growth and American Funds

0.63

Correlation Coefficient

Smallcap Growth  American Funds

Poor diversification

The 3 months correlation between Smallcap and American is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Growth Fund and American Funds Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Capital and Smallcap Growth 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 Smallcap Growth 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 Capital has no effect on the direction of Smallcap Growth i.e., Smallcap Growth and American Funds go up and down completely randomly.

Pair Corralation between Smallcap Growth and American Funds

Assuming the 90 days horizon Smallcap Growth Fund is expected to generate 1.71 times more return on investment than American Funds. However, Smallcap Growth is 1.71 times more volatile than American Funds Capital. It trades about 0.18 of its potential returns per unit of risk. American Funds Capital is currently generating about 0.12 per unit of risk. If you would invest  1,521  in Smallcap Growth Fund on September 4, 2024 and sell it today you would earn a total of  207.00  from holding Smallcap Growth Fund or generate 13.61% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Smallcap Growth Fund  vs.  American Funds Capital

Smallcap Growth

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Growth Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap Growth showed solid returns over the last few months and may actually be approaching a breakup point.

American Funds Capital

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Capital are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. 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 Smallcap Growth and American Funds

The main advantage of trading using opposite Smallcap Growth and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smallcap Growth 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 Smallcap Growth Fund and American Funds Capital 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.

Check out your portfolio center.

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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.