Correlation Between Ishares Municipal and Small Cap

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

Diversification Opportunities for Ishares Municipal and Small Cap

0.58
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Ishares and SMALL is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Ishares Municipal Bond and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth 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 Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Growth has no effect on the direction of Ishares Municipal i.e., Ishares Municipal and Small Cap go up and down completely randomly.

Pair Corralation between Ishares Municipal and Small Cap

Assuming the 90 days horizon Ishares Municipal Bond is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Ishares Municipal Bond is 4.08 times less risky than Small Cap. The mutual fund trades about -0.1 of its potential returns per unit of risk. The Small Cap Growth is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  2,028  in Small Cap Growth on October 26, 2024 and sell it today you would lose (17.00) from holding Small Cap Growth or give up 0.84% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Ishares Municipal Bond  vs.  Small Cap Growth

 Performance 
       Timeline  
Ishares Municipal Bond 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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 basic indicators, Ishares Municipal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Small Cap Growth 

Risk-Adjusted Performance

8 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Ishares Municipal and Small Cap Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Ishares Municipal and Small Cap

The main advantage of trading using opposite Ishares Municipal and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ishares Municipal position performs unexpectedly, Small Cap 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 Small Cap will offset losses from the drop in Small Cap's long position.
The idea behind Ishares Municipal Bond and Small Cap Growth 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.

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