Correlation Between Extended Market and American Funds

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

By analyzing existing cross correlation between Extended Market Index and American Funds Growth, you can compare the effects of market volatilities on Extended Market 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 Extended Market with a short position of American Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Extended Market and American Funds.

Diversification Opportunities for Extended Market and American Funds

0.45

Correlation Coefficient

Extended Market  American Funds

Very weak diversification

The 3 months correlation between Extended and American is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Extended Market Index and American Funds Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Growth and Extended Market 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 Extended Market Index 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 Growth has no effect on the direction of Extended Market i.e., Extended Market and American Funds go up and down completely randomly.

Pair Corralation between Extended Market and American Funds

Assuming the 90 days horizon Extended Market Index is expected to under-perform the American Funds. In addition to that, Extended Market is 2.71 times more volatile than American Funds Growth. It trades about -0.33 of its total potential returns per unit of risk. American Funds Growth is currently generating about -0.01 per unit of volatility. If you would invest  2,735  in American Funds Growth on September 25, 2024 and sell it today you would lose (6.00) from holding American Funds Growth or give up 0.22% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.24%
Values	Daily Returns

Extended Market Index  vs.  American Funds Growth

Extended Market Index

Risk-Adjusted Performance

0 of 100

Very Weak

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

American Funds Growth

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Growth are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental 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 Extended Market and American Funds

The main advantage of trading using opposite Extended Market and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Extended Market 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 Extended Market Index and American Funds 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 Global Correlations module to find global opportunities by holding instruments from different markets.