Correlation Between Western Asset and American Funds

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

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

Diversification Opportunities for Western Asset and American Funds

0.82

Correlation Coefficient

Western Asset  American Funds

Very poor diversification

The 3 months correlation between Western and American is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset High and American Funds Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Growth and Western Asset 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 Western Asset High 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 Growth has no effect on the direction of Western Asset i.e., Western Asset and American Funds go up and down completely randomly.

Pair Corralation between Western Asset and American Funds

Assuming the 90 days horizon Western Asset is expected to generate 4.38 times less return on investment than American Funds. But when comparing it to its historical volatility, Western Asset High is 4.11 times less risky than American Funds. It trades about 0.17 of its potential returns per unit of risk. American Funds Growth is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  2,563  in American Funds Growth on September 12, 2024 and sell it today you would earn a total of  213.00  from holding American Funds Growth or generate 8.31% return on investment over 90 days.

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

Western Asset High  vs.  American Funds Growth

Western Asset High

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Western Asset High are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Western Asset is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

American Funds Growth

Risk-Adjusted Performance

14 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in American Funds Growth are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly conflicting technical and fundamental indicators, American Funds may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Western Asset and American Funds

The main advantage of trading using opposite Western Asset and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Asset 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 Western Asset High and American Funds 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.

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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 Money Managers module to screen money managers from public funds and ETFs managed around the world.