Correlation Between Tax-managed and American Balanced

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

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

Diversification Opportunities for Tax-managed and American Balanced

0.85

Correlation Coefficient

Tax-managed  American Balanced

Very poor diversification

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

Pair Corralation between Tax-managed and American Balanced

Assuming the 90 days horizon Tax Managed Mid Small is expected to generate 2.33 times more return on investment than American Balanced. However, Tax-managed is 2.33 times more volatile than American Balanced Fund. It trades about 0.16 of its potential returns per unit of risk. American Balanced Fund is currently generating about 0.16 per unit of risk. If you would invest  4,115  in Tax Managed Mid Small on September 3, 2024 and sell it today you would earn a total of  455.00  from holding Tax Managed Mid Small or generate 11.06% return on investment over 90 days.

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

Tax Managed Mid Small  vs.  American Balanced Fund

Tax Managed Mid

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Managed Mid Small are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Tax-managed may actually be approaching a critical reversion point that can send shares even higher in January 2025.

American Balanced

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Balanced Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and 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.

Pair Trading with Tax-managed and American Balanced

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

The idea behind Tax Managed Mid Small and American Balanced Fund 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.