Correlation Between Morningstar Defensive and American Funds

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

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

Diversification Opportunities for Morningstar Defensive and American Funds

0.35

Correlation Coefficient

Morningstar Defensive  American Funds

Weak diversification

The 3 months correlation between Morningstar and American is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and American Funds Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Income and Morningstar Defensive 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 Morningstar Defensive 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 Income has no effect on the direction of Morningstar Defensive i.e., Morningstar Defensive and American Funds go up and down completely randomly.

Pair Corralation between Morningstar Defensive and American Funds

Assuming the 90 days horizon Morningstar Defensive is expected to generate 1.92 times less return on investment than American Funds. But when comparing it to its historical volatility, Morningstar Defensive Bond is 2.48 times less risky than American Funds. It trades about 0.15 of its potential returns per unit of risk. American Funds Income is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,144  in American Funds Income on September 14, 2024 and sell it today you would earn a total of  217.00  from holding American Funds Income or generate 18.97% return on investment over 90 days.

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

Morningstar Defensive Bond  vs.  American Funds Income

Morningstar Defensive

Risk-Adjusted Performance

0 of 100

Very Weak

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

American Funds Income

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Income are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong 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.

Pair Trading with Morningstar Defensive and American Funds

The main advantage of trading using opposite Morningstar Defensive and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Morningstar Defensive 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 Morningstar Defensive Bond and American Funds Income 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.

Check out your portfolio center.

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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.