Correlation Between Prudential Government and Prudential Muni

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

By analyzing existing cross correlation between Prudential Government Income and Prudential Muni High, you can compare the effects of market volatilities on Prudential Government and Prudential Muni 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 Prudential Government with a short position of Prudential Muni. Check out your portfolio center. Please also check ongoing floating volatility patterns of Prudential Government and Prudential Muni.

Diversification Opportunities for Prudential Government and Prudential Muni

0.66

Correlation Coefficient

Prudential Government  Prudential Muni

Poor diversification

The 3 months correlation between Prudential and Prudential is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Prudential Government Income and Prudential Muni High in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Muni High and Prudential Government 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 Prudential Government Income are associated (or correlated) with Prudential Muni. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Muni High has no effect on the direction of Prudential Government i.e., Prudential Government and Prudential Muni go up and down completely randomly.

Pair Corralation between Prudential Government and Prudential Muni

Assuming the 90 days horizon Prudential Government Income is expected to generate 1.04 times more return on investment than Prudential Muni. However, Prudential Government is 1.04 times more volatile than Prudential Muni High. It trades about -0.36 of its potential returns per unit of risk. Prudential Muni High is currently generating about -0.47 per unit of risk. If you would invest  787.00  in Prudential Government Income on September 28, 2024 and sell it today you would lose (15.00) from holding Prudential Government Income or give up 1.91% of portfolio value over 90 days.

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

Prudential Government Income  vs.  Prudential Muni High

Prudential Government

Risk-Adjusted Performance

0 of 100

Very Weak

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

Prudential Muni High

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Prudential Government and Prudential Muni

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

The idea behind Prudential Government Income and Prudential Muni High 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.