Correlation Between Short-term Bond and American Funds

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

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

Diversification Opportunities for Short-term Bond and American Funds

-0.49

Correlation Coefficient

Short-term Bond  American Funds

Very good diversification

The 3 months correlation between Short-term and American is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Bond Fund and American Funds Fundamental in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Funda and Short-term Bond 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 Short Term Bond Fund 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 Funda has no effect on the direction of Short-term Bond i.e., Short-term Bond and American Funds go up and down completely randomly.

Pair Corralation between Short-term Bond and American Funds

Assuming the 90 days horizon Short-term Bond is expected to generate 6.58 times less return on investment than American Funds. But when comparing it to its historical volatility, Short Term Bond Fund is 4.81 times less risky than American Funds. It trades about 0.08 of its potential returns per unit of risk. American Funds Fundamental is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  5,618  in American Funds Fundamental on September 5, 2024 and sell it today you would earn a total of  3,265  from holding American Funds Fundamental or generate 58.12% return on investment over 90 days.

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

Short Term Bond Fund  vs.  American Funds Fundamental

Short Term Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

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.

Pair Trading with Short-term Bond and American Funds

The main advantage of trading using opposite Short-term Bond and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short-term Bond 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 Short Term Bond Fund and American Funds Fundamental 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.