Correlation Between Tax-managed and American Funds

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

By analyzing existing cross correlation between Tax Managed Large Cap and American Funds New, you can compare the effects of market volatilities on Tax-managed 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 Tax-managed with a short position of American Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-managed and American Funds.

Diversification Opportunities for Tax-managed and American Funds

0.18

Correlation Coefficient

Tax-managed  American Funds

Average diversification

The 3 months correlation between Tax-managed and American is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Large Cap and American Funds New in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds New and Tax-managed 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 Tax Managed Large Cap 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 New has no effect on the direction of Tax-managed i.e., Tax-managed and American Funds go up and down completely randomly.

Pair Corralation between Tax-managed and American Funds

Assuming the 90 days horizon Tax Managed Large Cap is expected to under-perform the American Funds. In addition to that, Tax-managed is 1.13 times more volatile than American Funds New. It trades about -0.07 of its total potential returns per unit of risk. American Funds New is currently generating about 0.06 per unit of volatility. If you would invest  7,812  in American Funds New on December 24, 2024 and sell it today you would earn a total of  245.00  from holding American Funds New or generate 3.14% return on investment over 90 days.

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

Tax Managed Large Cap  vs.  American Funds New

Tax Managed Large

Risk-Adjusted Performance

Very Weak

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

American Funds New

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds New are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. 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.

Pair Trading with Tax-managed and American Funds

The main advantage of trading using opposite Tax-managed and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax-managed 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 Tax Managed Large Cap and American Funds New 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.