Correlation Between American High-income and Smallcap World

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

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

Diversification Opportunities for American High-income and Smallcap World

0.69

Correlation Coefficient

American High-income  Smallcap World

Poor diversification

The 3 months correlation between American and Smallcap is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding American High Income Municipal and Smallcap World Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap World and American High-income 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 High Income Municipal are associated (or correlated) with Smallcap World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap World has no effect on the direction of American High-income i.e., American High-income and Smallcap World go up and down completely randomly.

Pair Corralation between American High-income and Smallcap World

Assuming the 90 days horizon American High-income is expected to generate 31.36 times less return on investment than Smallcap World. But when comparing it to its historical volatility, American High Income Municipal is 3.69 times less risky than Smallcap World. It trades about 0.04 of its potential returns per unit of risk. Smallcap World Fund is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  5,949  in Smallcap World Fund on April 25, 2025 and sell it today you would earn a total of  970.00  from holding Smallcap World Fund or generate 16.31% return on investment over 90 days.

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

American High Income Municipal  vs.  Smallcap World Fund

American High Income

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American High Income Municipal are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, American High-income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Smallcap World

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 25 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Smallcap World showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American High-income and Smallcap World

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

The idea behind American High Income Municipal and Smallcap World 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.

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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..