Correlation Between Tax-exempt Bond and International Developed

Can any of the company-specific risk be diversified away by investing in both Tax-exempt Bond and International Developed 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 Tax-exempt Bond and International Developed into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Tax Exempt Bond Fund and International Developed Markets, you can compare the effects of market volatilities on Tax-exempt Bond and International Developed 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 Tax-exempt Bond with a short position of International Developed. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-exempt Bond and International Developed.

Diversification Opportunities for Tax-exempt Bond and International Developed

0.39

Correlation Coefficient

Tax-exempt Bond  International Developed

Weak diversification

The 3 months correlation between Tax-exempt and International is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond Fund and International Developed Market in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Developed and Tax-exempt Bond 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 Tax Exempt Bond Fund are associated (or correlated) with International Developed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Developed has no effect on the direction of Tax-exempt Bond i.e., Tax-exempt Bond and International Developed go up and down completely randomly.

Pair Corralation between Tax-exempt Bond and International Developed

Assuming the 90 days horizon Tax Exempt Bond Fund is expected to generate 0.25 times more return on investment than International Developed. However, Tax Exempt Bond Fund is 4.06 times less risky than International Developed. It trades about 0.08 of its potential returns per unit of risk. International Developed Markets is currently generating about -0.03 per unit of risk. If you would invest  2,199  in Tax Exempt Bond Fund on September 5, 2024 and sell it today you would earn a total of  20.00  from holding Tax Exempt Bond Fund or generate 0.91% return on investment over 90 days.

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

Tax Exempt Bond Fund  vs.  International Developed Market

Tax Exempt Bond

Risk-Adjusted Performance

6 of 100

Modest

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

International Developed

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Tax-exempt Bond and International Developed

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

The idea behind Tax Exempt Bond Fund and International Developed Markets 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.