Correlation Between American Funds and Mid Cap

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

By analyzing existing cross correlation between American Funds Tax Advantaged and Mid Cap Growth, you can compare the effects of market volatilities on American Funds and Mid Cap 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 Mid Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Mid Cap.

Diversification Opportunities for American Funds and Mid Cap

0.37

Correlation Coefficient

American Funds  Mid Cap

Weak diversification

The 3 months correlation between American and Mid is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding American Funds Tax Advantaged and Mid Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Growth 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 Tax Advantaged are associated (or correlated) with Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Growth has no effect on the direction of American Funds i.e., American Funds and Mid Cap go up and down completely randomly.

Pair Corralation between American Funds and Mid Cap

Assuming the 90 days horizon American Funds Tax Advantaged is expected to generate 0.23 times more return on investment than Mid Cap. However, American Funds Tax Advantaged is 4.43 times less risky than Mid Cap. It trades about 0.04 of its potential returns per unit of risk. Mid Cap Growth is currently generating about -0.05 per unit of risk. If you would invest  1,567  in American Funds Tax Advantaged on December 28, 2024 and sell it today you would earn a total of  14.00  from holding American Funds Tax Advantaged or generate 0.89% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

American Funds Tax Advantaged  vs.  Mid Cap Growth

American Funds Tax

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Tax Advantaged are ranked lower than 2 (%) 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.

Mid Cap Growth

Risk-Adjusted Performance

Very Weak

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

Pair Trading with American Funds and Mid Cap

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

The idea behind American Funds Tax Advantaged and Mid Cap Growth 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.