Correlation Between American High-income and American Funds

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Can any of the company-specific risk be diversified away by investing in both American High-income 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 American High-income and American Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American High Income Municipal and American Funds Tax Exempt, you can compare the effects of market volatilities on American High-income 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 American High-income with a short position of American Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of American High-income and American Funds.

Diversification Opportunities for American High-income and American Funds

0.88
  Correlation Coefficient

Very poor diversification

The 3 months correlation between American and American is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding American High Income Municipal and American Funds Tax Exempt in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Tax and American High-income 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 High Income Municipal 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 Tax has no effect on the direction of American High-income i.e., American High-income and American Funds go up and down completely randomly.

Pair Corralation between American High-income and American Funds

Assuming the 90 days horizon American High Income Municipal is expected to generate 2.07 times more return on investment than American Funds. However, American High-income is 2.07 times more volatile than American Funds Tax Exempt. It trades about 0.07 of its potential returns per unit of risk. American Funds Tax Exempt is currently generating about 0.05 per unit of risk. If you would invest  1,543  in American High Income Municipal on September 6, 2024 and sell it today you would earn a total of  18.00  from holding American High Income Municipal or generate 1.17% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

American High Income Municipal  vs.  American Funds Tax Exempt

 Performance 
       Timeline  
American High Income 

Risk-Adjusted Performance

5 of 100

 
Weak
 
Strong
Modest
Compared to the overall equity markets, risk-adjusted returns on investments in American High Income Municipal 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 High-income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
American Funds Tax 

Risk-Adjusted Performance

4 of 100

 
Weak
 
Strong
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Tax Exempt are ranked lower than 4 (%) 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.

American High-income and American Funds Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with American High-income and American Funds

The main advantage of trading using opposite American High-income and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American High-income 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 American High Income Municipal and American Funds Tax Exempt 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.

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