Correlation Between American High and Vanguard High-yield
Can any of the company-specific risk be diversified away by investing in both American High and Vanguard High-yield 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 and Vanguard High-yield into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American High Income and Vanguard High Yield Corporate, you can compare the effects of market volatilities on American High and Vanguard High-yield 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 with a short position of Vanguard High-yield. Check out your portfolio center. Please also check ongoing floating volatility patterns of American High and Vanguard High-yield.
Diversification Opportunities for American High and Vanguard High-yield
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between American and Vanguard is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding American High Income and Vanguard High Yield Corporate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard High Yield and American High 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 are associated (or correlated) with Vanguard High-yield. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard High Yield has no effect on the direction of American High i.e., American High and Vanguard High-yield go up and down completely randomly.
Pair Corralation between American High and Vanguard High-yield
Assuming the 90 days horizon American High Income is expected to generate 0.98 times more return on investment than Vanguard High-yield. However, American High Income is 1.02 times less risky than Vanguard High-yield. It trades about 0.3 of its potential returns per unit of risk. Vanguard High Yield Corporate is currently generating about 0.21 per unit of risk. If you would invest 976.00 in American High Income on August 31, 2024 and sell it today you would earn a total of 10.00 from holding American High Income or generate 1.02% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
American High Income vs. Vanguard High Yield Corporate
Performance |
| Timeline |
| American High Income |
| Vanguard High Yield |
American High and Vanguard High-yield Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American High and Vanguard High-yield
The main advantage of trading using opposite American High and Vanguard High-yield positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American High position performs unexpectedly, Vanguard High-yield 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 Vanguard High-yield will offset losses from the drop in Vanguard High-yield's long position.The idea behind American High Income and Vanguard High Yield Corporate 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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