Correlation Between Capital Income and Adams Natural

Can any of the company-specific risk be diversified away by investing in both Capital Income and Adams Natural 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 Capital Income and Adams Natural into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Capital Income Builder and Adams Natural Resources, you can compare the effects of market volatilities on Capital Income and Adams Natural 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 Capital Income with a short position of Adams Natural. Check out your portfolio center. Please also check ongoing floating volatility patterns of Capital Income and Adams Natural.

Diversification Opportunities for Capital Income and Adams Natural

0.3

Correlation Coefficient

Capital Income  Adams Natural

Weak diversification

The 3 months correlation between Capital and Adams is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Capital Income Builder and Adams Natural Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Adams Natural Resources and Capital Income 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 Capital Income Builder are associated (or correlated) with Adams Natural. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Adams Natural Resources has no effect on the direction of Capital Income i.e., Capital Income and Adams Natural go up and down completely randomly.

Pair Corralation between Capital Income and Adams Natural

Assuming the 90 days horizon Capital Income is expected to generate 5.77 times less return on investment than Adams Natural. But when comparing it to its historical volatility, Capital Income Builder is 2.14 times less risky than Adams Natural. It trades about 0.05 of its potential returns per unit of risk. Adams Natural Resources is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,167  in Adams Natural Resources on September 4, 2024 and sell it today you would earn a total of  175.00  from holding Adams Natural Resources or generate 8.08% return on investment over 90 days.

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

Capital Income Builder  vs.  Adams Natural Resources

Capital Income Builder

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Capital Income Builder are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Capital Income is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Adams Natural Resources

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Adams Natural Resources are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of very fragile technical and fundamental indicators, Adams Natural may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Capital Income and Adams Natural

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

The idea behind Capital Income Builder and Adams Natural Resources 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 Global Correlations module to find global opportunities by holding instruments from different markets.