Correlation Between American Funds and Tax-managed

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

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

Diversification Opportunities for American Funds and Tax-managed

0.84

Correlation Coefficient

American Funds  Tax-managed

Very poor diversification

The 3 months correlation between American and Tax-managed is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding American Funds Fundamental and Tax Managed Mid Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax Managed Mid 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 Fundamental are associated (or correlated) with Tax-managed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax Managed Mid has no effect on the direction of American Funds i.e., American Funds and Tax-managed go up and down completely randomly.

Pair Corralation between American Funds and Tax-managed

Assuming the 90 days horizon American Funds is expected to generate 1.27 times less return on investment than Tax-managed. But when comparing it to its historical volatility, American Funds Fundamental is 1.48 times less risky than Tax-managed. It trades about 0.2 of its potential returns per unit of risk. Tax Managed Mid Small is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  4,084  in Tax Managed Mid Small on September 5, 2024 and sell it today you would earn a total of  494.00  from holding Tax Managed Mid Small or generate 12.1% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

American Funds Fundamental  vs.  Tax Managed Mid Small

American Funds Funda

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Fundamental are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, American Funds may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Tax Managed Mid

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Managed Mid Small are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Tax-managed may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with American Funds and Tax-managed

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

The idea behind American Funds Fundamental and Tax Managed Mid Small 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.