Correlation Between Taxable Municipal and Tennessee Tax-free

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

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

Diversification Opportunities for Taxable Municipal and Tennessee Tax-free

0.45

Correlation Coefficient

Taxable Municipal  Tennessee Tax-free

Very weak diversification

The 3 months correlation between Taxable and Tennessee is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Taxable Municipal Bond and Tennessee Tax Free Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tennessee Tax Free and Taxable 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 Taxable Municipal Bond are associated (or correlated) with Tennessee Tax-free. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tennessee Tax Free has no effect on the direction of Taxable Municipal i.e., Taxable Municipal and Tennessee Tax-free go up and down completely randomly.

Pair Corralation between Taxable Municipal and Tennessee Tax-free

Assuming the 90 days horizon Taxable Municipal Bond is expected to generate 1.36 times more return on investment than Tennessee Tax-free. However, Taxable Municipal is 1.36 times more volatile than Tennessee Tax Free Income. It trades about 0.09 of its potential returns per unit of risk. Tennessee Tax Free Income is currently generating about -0.08 per unit of risk. If you would invest  723.00  in Taxable Municipal Bond on December 30, 2024 and sell it today you would earn a total of  16.00  from holding Taxable Municipal Bond or generate 2.21% return on investment over 90 days.

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

Taxable Municipal Bond  vs.  Tennessee Tax Free Income

Taxable Municipal Bond

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Taxable Municipal Bond are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary indicators, Taxable Municipal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Tennessee Tax Free

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Taxable Municipal and Tennessee Tax-free

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

The idea behind Taxable Municipal Bond and Tennessee Tax Free Income 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.