Correlation Between Vanguard Municipal and American Funds

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

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

Diversification Opportunities for Vanguard Municipal and American Funds

0.0

Correlation Coefficient

Vanguard Municipal  American Funds

Pay attention - limited upside

The 3 months correlation between Vanguard and American is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Municipal Bond and American Funds Global in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Global and Vanguard Municipal 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 Vanguard Municipal Bond 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 Global has no effect on the direction of Vanguard Municipal i.e., Vanguard Municipal and American Funds go up and down completely randomly.

Pair Corralation between Vanguard Municipal and American Funds

Assuming the 90 days horizon Vanguard Municipal is expected to generate 5.82 times less return on investment than American Funds. But when comparing it to its historical volatility, Vanguard Municipal Bond is 7.86 times less risky than American Funds. It trades about 0.1 of its potential returns per unit of risk. American Funds Global is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,681  in American Funds Global on December 4, 2024 and sell it today you would earn a total of  574.00  from holding American Funds Global or generate 34.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	96.96%
Values	Daily Returns

Vanguard Municipal Bond  vs.  American Funds Global

Vanguard Municipal Bond

Risk-Adjusted Performance

Very Weak

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

American Funds Global

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Vanguard Municipal and American Funds

The main advantage of trading using opposite Vanguard Municipal and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Municipal 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 Vanguard Municipal Bond and American Funds Global 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.