Correlation Between New World and Tax Exempt

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

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

Diversification Opportunities for New World and Tax Exempt

0.12

Correlation Coefficient

New World  Tax Exempt

Average diversification

The 3 months correlation between New and Tax is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding New World Fund and Tax Exempt Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax Exempt Bond and New World 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 New World Fund are associated (or correlated) with Tax Exempt. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax Exempt Bond has no effect on the direction of New World i.e., New World and Tax Exempt go up and down completely randomly.

Pair Corralation between New World and Tax Exempt

Assuming the 90 days horizon New World Fund is expected to generate 2.26 times more return on investment than Tax Exempt. However, New World is 2.26 times more volatile than Tax Exempt Bond. It trades about 0.35 of its potential returns per unit of risk. Tax Exempt Bond is currently generating about 0.08 per unit of risk. If you would invest  7,837  in New World Fund on September 16, 2024 and sell it today you would earn a total of  242.00  from holding New World Fund or generate 3.09% return on investment over 90 days.

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

New World Fund  vs.  Tax Exempt Bond

New World Fund

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in New World Fund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, New World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Tax Exempt Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with New World and Tax Exempt

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

The idea behind New World Fund and Tax Exempt 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.