Correlation Between Tax Exempt and Sparta Capital

Can any of the company-specific risk be diversified away by investing in both Tax Exempt and Sparta Capital 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 Sparta Capital 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 Sparta Capital, you can compare the effects of market volatilities on Tax Exempt and Sparta Capital 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 Sparta Capital. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Sparta Capital.

Diversification Opportunities for Tax Exempt and Sparta Capital

0.27

Correlation Coefficient

Tax Exempt  Sparta Capital

Modest diversification

The 3 months correlation between Tax and Sparta is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and Sparta Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sparta Capital 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 Sparta Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sparta Capital has no effect on the direction of Tax Exempt i.e., Tax Exempt and Sparta Capital go up and down completely randomly.

Pair Corralation between Tax Exempt and Sparta Capital

Assuming the 90 days horizon Tax Exempt Bond is expected to generate 0.06 times more return on investment than Sparta Capital. However, Tax Exempt Bond is 18.05 times less risky than Sparta Capital. It trades about -0.02 of its potential returns per unit of risk. Sparta Capital is currently generating about -0.13 per unit of risk. If you would invest  1,253  in Tax Exempt Bond on December 1, 2024 and sell it today you would lose (4.00) from holding Tax Exempt Bond or give up 0.32% of portfolio value over 90 days.

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

Tax Exempt Bond  vs.  Sparta Capital

Tax Exempt Bond

Risk-Adjusted Performance

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.

Sparta Capital

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sparta Capital has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Tax Exempt and Sparta Capital

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

The idea behind Tax Exempt Bond and Sparta Capital 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.