Correlation Between American Balanced and Madison Diversified

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

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

Diversification Opportunities for American Balanced and Madison Diversified

0.85

Correlation Coefficient

American Balanced  Madison Diversified

Very poor diversification

The 3 months correlation between American and Madison is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding American Balanced Fund and Madison Diversified Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Madison Diversified and American Balanced 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 Balanced Fund are associated (or correlated) with Madison Diversified. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Madison Diversified has no effect on the direction of American Balanced i.e., American Balanced and Madison Diversified go up and down completely randomly.

Pair Corralation between American Balanced and Madison Diversified

Assuming the 90 days horizon American Balanced Fund is expected to generate 1.76 times more return on investment than Madison Diversified. However, American Balanced is 1.76 times more volatile than Madison Diversified Income. It trades about 0.13 of its potential returns per unit of risk. Madison Diversified Income is currently generating about 0.08 per unit of risk. If you would invest  3,557  in American Balanced Fund on September 13, 2024 and sell it today you would earn a total of  126.00  from holding American Balanced Fund or generate 3.54% return on investment over 90 days.

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

American Balanced Fund  vs.  Madison Diversified Income

American Balanced

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Balanced Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, American Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Madison Diversified

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Madison Diversified Income are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Madison Diversified 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 Balanced and Madison Diversified

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

The idea behind American Balanced Fund and Madison Diversified 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.

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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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.