Correlation Between Tax Exempt and Sit Tax

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

By analyzing existing cross correlation between Tax Exempt Bond and Sit Tax Free Income, you can compare the effects of market volatilities on Tax Exempt and Sit Tax 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 Tax Exempt with a short position of Sit Tax. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Sit Tax.

Diversification Opportunities for Tax Exempt and Sit Tax

0.91

Correlation Coefficient

Tax Exempt  Sit Tax

Almost no diversification

The 3 months correlation between Tax and Sit is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and Sit Tax Free Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sit Tax Free and Tax Exempt 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 Tax Exempt Bond are associated (or correlated) with Sit Tax. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sit Tax Free has no effect on the direction of Tax Exempt i.e., Tax Exempt and Sit Tax go up and down completely randomly.

Pair Corralation between Tax Exempt and Sit Tax

Assuming the 90 days horizon Tax Exempt Bond is expected to generate 0.73 times more return on investment than Sit Tax. However, Tax Exempt Bond is 1.38 times less risky than Sit Tax. It trades about -0.25 of its potential returns per unit of risk. Sit Tax Free Income is currently generating about -0.21 per unit of risk. If you would invest  1,252  in Tax Exempt Bond on September 26, 2024 and sell it today you would lose (16.00) from holding Tax Exempt Bond or give up 1.28% of portfolio value over 90 days.

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

Tax Exempt Bond  vs.  Sit Tax Free Income

Tax Exempt Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tax Exempt Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Tax Exempt is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Sit Tax Free

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Sit Tax Free Income has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Sit Tax is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Tax Exempt and Sit Tax

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

The idea behind Tax Exempt Bond and Sit Tax Free Income 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .