Correlation Between Limited Term and The National

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

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

Diversification Opportunities for Limited Term and The National

0.98

Correlation Coefficient

Limited Term  The National

Almost no diversification

The 3 months correlation between Limited and The is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Limited Term Tax and The National Tax Free in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Tax and Limited Term 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 Limited Term Tax are associated (or correlated) with The National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Tax has no effect on the direction of Limited Term i.e., Limited Term and The National go up and down completely randomly.

Pair Corralation between Limited Term and The National

Assuming the 90 days horizon Limited Term Tax is expected to generate 0.76 times more return on investment than The National. However, Limited Term Tax is 1.32 times less risky than The National. It trades about 0.14 of its potential returns per unit of risk. The National Tax Free is currently generating about 0.08 per unit of risk. If you would invest  1,517  in Limited Term Tax on December 20, 2024 and sell it today you would earn a total of  17.00  from holding Limited Term Tax or generate 1.12% return on investment over 90 days.

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

Limited Term Tax  vs.  The National Tax Free

Limited Term Tax

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Limited Term Tax are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Limited Term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

National Tax

Risk-Adjusted Performance

Modest

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

Pair Trading with Limited Term and The National

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

The idea behind Limited Term Tax and The National Tax Free 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.