Correlation Between American Funds and Energy Basic

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

By analyzing existing cross correlation between American Funds 2035 and Energy Basic Materials, you can compare the effects of market volatilities on American Funds and Energy Basic 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 Energy Basic. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Energy Basic.

Diversification Opportunities for American Funds and Energy Basic

0.28

Correlation Coefficient

American Funds  Energy Basic

Modest diversification

The 3 months correlation between American and Energy is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding American Funds 2035 and Energy Basic Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Basic Materials 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 2035 are associated (or correlated) with Energy Basic. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Basic Materials has no effect on the direction of American Funds i.e., American Funds and Energy Basic go up and down completely randomly.

Pair Corralation between American Funds and Energy Basic

Assuming the 90 days horizon American Funds 2035 is expected to generate 0.7 times more return on investment than Energy Basic. However, American Funds 2035 is 1.43 times less risky than Energy Basic. It trades about 0.01 of its potential returns per unit of risk. Energy Basic Materials is currently generating about -0.08 per unit of risk. If you would invest  1,903  in American Funds 2035 on September 30, 2024 and sell it today you would earn a total of  17.00  from holding American Funds 2035 or generate 0.89% return on investment over 90 days.

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

American Funds 2035  vs.  Energy Basic Materials

American Funds 2035

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Funds 2035 has generated negative risk-adjusted returns adding no value to fund investors. 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.

Energy Basic Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy Basic Materials has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental drivers remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with American Funds and Energy Basic

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

The idea behind American Funds 2035 and Energy Basic Materials 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.