Correlation Between Franklin Federal and Vanguard Long

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

By analyzing existing cross correlation between Franklin Federal Tax Free and Vanguard Long Term Tax Exempt, you can compare the effects of market volatilities on Franklin Federal and Vanguard Long 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 Franklin Federal with a short position of Vanguard Long. Check out your portfolio center. Please also check ongoing floating volatility patterns of Franklin Federal and Vanguard Long.

Diversification Opportunities for Franklin Federal and Vanguard Long

1.0

Correlation Coefficient

Franklin Federal  Vanguard Long

No risk reduction

The 3 months correlation between Franklin and Vanguard is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Franklin Federal Tax Free and Vanguard Long Term Tax Exempt in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Long Term and Franklin Federal 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 Franklin Federal Tax Free are associated (or correlated) with Vanguard Long. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Long Term has no effect on the direction of Franklin Federal i.e., Franklin Federal and Vanguard Long go up and down completely randomly.

Pair Corralation between Franklin Federal and Vanguard Long

Assuming the 90 days horizon Franklin Federal Tax Free is expected to under-perform the Vanguard Long. But the mutual fund apears to be less risky and, when comparing its historical volatility, Franklin Federal Tax Free is 1.04 times less risky than Vanguard Long. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Vanguard Long Term Tax Exempt is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,097  in Vanguard Long Term Tax Exempt on November 29, 2024 and sell it today you would lose (6.00) from holding Vanguard Long Term Tax Exempt or give up 0.55% of portfolio value over 90 days.

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

Franklin Federal Tax Free  vs.  Vanguard Long Term Tax Exempt

Franklin Federal Tax

Risk-Adjusted Performance

Very Weak

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

Vanguard Long Term

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Franklin Federal and Vanguard Long

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

The idea behind Franklin Federal Tax Free and Vanguard Long Term Tax Exempt 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 Transaction History module to view history of all your transactions and understand their impact on performance.