Correlation Between Capital World and Brown Advisory

Can any of the company-specific risk be diversified away by investing in both Capital World and Brown Advisory 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 Capital World and Brown Advisory into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Capital World Growth and Brown Advisory Growth, you can compare the effects of market volatilities on Capital World and Brown Advisory 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 Capital World with a short position of Brown Advisory. Check out your portfolio center. Please also check ongoing floating volatility patterns of Capital World and Brown Advisory.

Diversification Opportunities for Capital World and Brown Advisory

0.6

Correlation Coefficient

Capital World  Brown Advisory

Poor diversification

The 3 months correlation between Capital and Brown is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Capital World Growth and Brown Advisory Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brown Advisory Growth and Capital World 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 Capital World Growth are associated (or correlated) with Brown Advisory. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brown Advisory Growth has no effect on the direction of Capital World i.e., Capital World and Brown Advisory go up and down completely randomly.

Pair Corralation between Capital World and Brown Advisory

Assuming the 90 days horizon Capital World is expected to generate 1.9 times less return on investment than Brown Advisory. But when comparing it to its historical volatility, Capital World Growth is 1.29 times less risky than Brown Advisory. It trades about 0.11 of its potential returns per unit of risk. Brown Advisory Growth is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  2,941  in Brown Advisory Growth on September 2, 2024 and sell it today you would earn a total of  260.00  from holding Brown Advisory Growth or generate 8.84% return on investment over 90 days.

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

Capital World Growth  vs.  Brown Advisory Growth

Capital World Growth

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Capital World Growth are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Capital World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Brown Advisory Growth

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with Capital World and Brown Advisory

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

The idea behind Capital World Growth and Brown Advisory Growth 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.