Correlation Between American Funds and Vanguard Value

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

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

Diversification Opportunities for American Funds and Vanguard Value

0.73

Correlation Coefficient

American Funds  Vanguard Value

Poor diversification

The 3 months correlation between American and Vanguard is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding American Funds Global and Vanguard Value Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Value Index 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 Global are associated (or correlated) with Vanguard Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Value Index has no effect on the direction of American Funds i.e., American Funds and Vanguard Value go up and down completely randomly.

Pair Corralation between American Funds and Vanguard Value

Assuming the 90 days horizon American Funds Global is expected to generate 1.14 times more return on investment than Vanguard Value. However, American Funds is 1.14 times more volatile than Vanguard Value Index. It trades about 0.16 of its potential returns per unit of risk. Vanguard Value Index is currently generating about -0.17 per unit of risk. If you would invest  2,383  in American Funds Global on September 14, 2024 and sell it today you would earn a total of  47.00  from holding American Funds Global or generate 1.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

American Funds Global  vs.  Vanguard Value Index

American Funds Global

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Global are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, American Funds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Value Index

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Value Index are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with American Funds and Vanguard Value

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

The idea behind American Funds Global and Vanguard Value Index 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.