Correlation Between Ishares Municipal and Ishares Tips

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

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

Diversification Opportunities for Ishares Municipal and Ishares Tips

0.72

Correlation Coefficient

Ishares Municipal  Ishares Tips

Poor diversification

The 3 months correlation between Ishares and Ishares is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Ishares Municipal Bond and Ishares Tips Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ishares Tips Bond and Ishares 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 Ishares Municipal Bond are associated (or correlated) with Ishares Tips. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ishares Tips Bond has no effect on the direction of Ishares Municipal i.e., Ishares Municipal and Ishares Tips go up and down completely randomly.

Pair Corralation between Ishares Municipal and Ishares Tips

Assuming the 90 days horizon Ishares Municipal Bond is expected to generate 1.2 times more return on investment than Ishares Tips. However, Ishares Municipal is 1.2 times more volatile than Ishares Tips Bond. It trades about -0.09 of its potential returns per unit of risk. Ishares Tips Bond is currently generating about -0.14 per unit of risk. If you would invest  1,116  in Ishares Municipal Bond on October 4, 2024 and sell it today you would lose (17.00) from holding Ishares Municipal Bond or give up 1.52% of portfolio value over 90 days.

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

Ishares Municipal Bond  vs.  Ishares Tips Bond

Ishares Municipal Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Ishares Tips Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Ishares Municipal and Ishares Tips

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

The idea behind Ishares Municipal Bond and Ishares Tips Bond 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..