Correlation Between IShares National and IShares GNMA

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

By analyzing existing cross correlation between iShares National Muni and iShares GNMA Bond, you can compare the effects of market volatilities on IShares National and IShares GNMA 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 National with a short position of IShares GNMA. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares National and IShares GNMA.

Diversification Opportunities for IShares National and IShares GNMA

0.64

Correlation Coefficient

IShares National  IShares GNMA

Poor diversification

The 3 months correlation between IShares and IShares is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding iShares National Muni and iShares GNMA Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares GNMA Bond and IShares National 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 National Muni are associated (or correlated) with IShares GNMA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares GNMA Bond has no effect on the direction of IShares National i.e., IShares National and IShares GNMA go up and down completely randomly.

Pair Corralation between IShares National and IShares GNMA

Considering the 90-day investment horizon iShares National Muni is expected to under-perform the IShares GNMA. But the etf apears to be less risky and, when comparing its historical volatility, iShares National Muni is 1.56 times less risky than IShares GNMA. The etf trades about -0.13 of its potential returns per unit of risk. The iShares GNMA Bond is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  4,301  in iShares GNMA Bond on September 22, 2024 and sell it today you would lose (1.00) from holding iShares GNMA Bond or give up 0.02% of portfolio value over 90 days.

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

iShares National Muni  vs.  iShares GNMA Bond

iShares National Muni

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares National Muni has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, IShares National is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

iShares GNMA Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares GNMA Bond has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong primary indicators, IShares GNMA is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with IShares National and IShares GNMA

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

The idea behind iShares National Muni and iShares GNMA Bond 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.