Correlation Between Balanced Fund and Capital World

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

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

Diversification Opportunities for Balanced Fund and Capital World

-0.53

Correlation Coefficient

Balanced Fund  Capital World

Excellent diversification

The 3 months correlation between Balanced and Capital is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Balanced Fund Investor and Capital World Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital World Bond and Balanced Fund 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 Balanced Fund Investor are associated (or correlated) with Capital World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital World Bond has no effect on the direction of Balanced Fund i.e., Balanced Fund and Capital World go up and down completely randomly.

Pair Corralation between Balanced Fund and Capital World

Assuming the 90 days horizon Balanced Fund Investor is expected to under-perform the Capital World. In addition to that, Balanced Fund is 2.03 times more volatile than Capital World Bond. It trades about -0.11 of its total potential returns per unit of risk. Capital World Bond is currently generating about 0.14 per unit of volatility. If you would invest  1,548  in Capital World Bond on December 30, 2024 and sell it today you would earn a total of  43.00  from holding Capital World Bond or generate 2.78% return on investment over 90 days.

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

Balanced Fund Investor  vs.  Capital World Bond

Balanced Fund Investor

Risk-Adjusted Performance

Very Weak

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

Capital World Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Capital World Bond are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Capital World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Balanced Fund and Capital World

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

The idea behind Balanced Fund Investor and Capital World Bond 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.