Correlation Between Ishares Municipal and California Bond

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

Diversification Opportunities for Ishares Municipal and California Bond

0.97

Correlation Coefficient

Ishares Municipal  California Bond

Almost no diversification

The 3 months correlation between Ishares and California is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Ishares Municipal Bond and California Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California 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 California Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California Bond has no effect on the direction of Ishares Municipal i.e., Ishares Municipal and California Bond go up and down completely randomly.

Pair Corralation between Ishares Municipal and California Bond

Assuming the 90 days horizon Ishares Municipal Bond is expected to under-perform the California Bond. But the mutual fund apears to be less risky and, when comparing its historical volatility, Ishares Municipal Bond is 1.25 times less risky than California Bond. The mutual fund trades about -0.05 of its potential returns per unit of risk. The California Bond Fund is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  1,022  in California Bond Fund on December 30, 2024 and sell it today you would lose (7.00) from holding California Bond Fund or give up 0.68% of portfolio value over 90 days.

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

Ishares Municipal Bond  vs.  California Bond Fund

Ishares Municipal Bond

Risk-Adjusted Performance

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.

California Bond

Risk-Adjusted Performance

Very Weak

Over the last 90 days California Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, California Bond 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 California Bond

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

The idea behind Ishares Municipal Bond and California Bond Fund 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.