Correlation Between American Funds and Target Retirement

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

By analyzing existing cross correlation between American Funds Retirement and Target Retirement 2040, you can compare the effects of market volatilities on American Funds and Target Retirement 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 Target Retirement. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Funds and Target Retirement.

Diversification Opportunities for American Funds and Target Retirement

0.79

Correlation Coefficient

American Funds  Target Retirement

Poor diversification

The 3 months correlation between American and Target is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding American Funds Retirement and Target Retirement 2040 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target Retirement 2040 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 Retirement are associated (or correlated) with Target Retirement. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target Retirement 2040 has no effect on the direction of American Funds i.e., American Funds and Target Retirement go up and down completely randomly.

Pair Corralation between American Funds and Target Retirement

Assuming the 90 days horizon American Funds is expected to generate 2.54 times less return on investment than Target Retirement. But when comparing it to its historical volatility, American Funds Retirement is 1.65 times less risky than Target Retirement. It trades about 0.04 of its potential returns per unit of risk. Target Retirement 2040 is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,355  in Target Retirement 2040 on August 30, 2024 and sell it today you would earn a total of  30.00  from holding Target Retirement 2040 or generate 2.21% return on investment over 90 days.

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

American Funds Retirement  vs.  Target Retirement 2040

American Funds Retirement

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Retirement are ranked lower than 3 (%) 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.

Target Retirement 2040

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Target Retirement 2040 are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Target Retirement 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 Target Retirement

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

The idea behind American Funds Retirement and Target Retirement 2040 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.