Correlation Between Diversified Municipal and Pacific Capital

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

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

Diversification Opportunities for Diversified Municipal and Pacific Capital

0.96

Correlation Coefficient

Diversified Municipal  Pacific Capital

Almost no diversification

The 3 months correlation between Diversified and Pacific is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Municipal Portfoli and Pacific Capital Tax Free in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pacific Capital Tax and Diversified 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 Diversified Municipal Portfolio are associated (or correlated) with Pacific Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pacific Capital Tax has no effect on the direction of Diversified Municipal i.e., Diversified Municipal and Pacific Capital go up and down completely randomly.

Pair Corralation between Diversified Municipal and Pacific Capital

Assuming the 90 days horizon Diversified Municipal Portfolio is expected to generate 1.03 times more return on investment than Pacific Capital. However, Diversified Municipal is 1.03 times more volatile than Pacific Capital Tax Free. It trades about -0.09 of its potential returns per unit of risk. Pacific Capital Tax Free is currently generating about -0.11 per unit of risk. If you would invest  1,396  in Diversified Municipal Portfolio on October 4, 2024 and sell it today you would lose (13.00) from holding Diversified Municipal Portfolio or give up 0.93% of portfolio value over 90 days.

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

Diversified Municipal Portfoli  vs.  Pacific Capital Tax Free

Diversified Municipal

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pacific Capital Tax

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Diversified Municipal and Pacific Capital

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

The idea behind Diversified Municipal Portfolio and Pacific Capital Tax Free 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..