Correlation Between High-yield Municipal and IShares ESG

Can any of the company-specific risk be diversified away by investing in both High-yield Municipal and IShares ESG 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 High-yield Municipal and IShares ESG into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between High Yield Municipal Fund and iShares ESG Aggregate, you can compare the effects of market volatilities on High-yield Municipal and IShares ESG 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 High-yield Municipal with a short position of IShares ESG. Check out your portfolio center. Please also check ongoing floating volatility patterns of High-yield Municipal and IShares ESG.

Diversification Opportunities for High-yield Municipal and IShares ESG

0.64

Correlation Coefficient

High-yield Municipal  IShares ESG

Poor diversification

The 3 months correlation between High-yield and IShares is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding High Yield Municipal Fund and iShares ESG Aggregate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares ESG Aggregate and High-yield Municipal 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 High Yield Municipal Fund are associated (or correlated) with IShares ESG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares ESG Aggregate has no effect on the direction of High-yield Municipal i.e., High-yield Municipal and IShares ESG go up and down completely randomly.

Pair Corralation between High-yield Municipal and IShares ESG

Assuming the 90 days horizon High Yield Municipal Fund is expected to under-perform the IShares ESG. But the mutual fund apears to be less risky and, when comparing its historical volatility, High Yield Municipal Fund is 1.13 times less risky than IShares ESG. The mutual fund trades about -0.03 of its potential returns per unit of risk. The iShares ESG Aggregate is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  4,621  in iShares ESG Aggregate on December 30, 2024 and sell it today you would earn a total of  115.00  from holding iShares ESG Aggregate or generate 2.49% return on investment over 90 days.

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

High Yield Municipal Fund  vs.  iShares ESG Aggregate

High Yield Municipal

Risk-Adjusted Performance

Very Weak

Over the last 90 days High Yield Municipal Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, High-yield Municipal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

iShares ESG Aggregate

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares ESG Aggregate are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, IShares ESG is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with High-yield Municipal and IShares ESG

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

The idea behind High Yield Municipal Fund and iShares ESG Aggregate 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.