Correlation Between North Carolina and Taxable Municipal

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

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

Diversification Opportunities for North Carolina and Taxable Municipal

0.81

Correlation Coefficient

North Carolina  Taxable Municipal

Very poor diversification

The 3 months correlation between North and Taxable is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding North Carolina Tax Free and Taxable Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taxable Municipal Bond and North Carolina 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 North Carolina Tax Free are associated (or correlated) with Taxable Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taxable Municipal Bond has no effect on the direction of North Carolina i.e., North Carolina and Taxable Municipal go up and down completely randomly.

Pair Corralation between North Carolina and Taxable Municipal

Assuming the 90 days horizon North Carolina Tax Free is expected to generate 0.42 times more return on investment than Taxable Municipal. However, North Carolina Tax Free is 2.38 times less risky than Taxable Municipal. It trades about 0.01 of its potential returns per unit of risk. Taxable Municipal Bond is currently generating about 0.0 per unit of risk. If you would invest  1,064  in North Carolina Tax Free on October 3, 2024 and sell it today you would earn a total of  3.00  from holding North Carolina Tax Free or generate 0.28% return on investment over 90 days.

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

North Carolina Tax Free  vs.  Taxable Municipal Bond

North Carolina Tax

Risk-Adjusted Performance

0 of 100

Very Weak

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

Taxable Municipal Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Taxable Municipal Bond has generated negative risk-adjusted returns adding no value to fund investors. 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.

Pair Trading with North Carolina and Taxable Municipal

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

The idea behind North Carolina Tax Free and Taxable Municipal 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.

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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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.