Correlation Between Tax Exempt and Multisector Bond

Can any of the company-specific risk be diversified away by investing in both Tax Exempt and Multisector Bond 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 and Multisector Bond 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 Multisector Bond Sma, you can compare the effects of market volatilities on Tax Exempt and Multisector Bond 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 with a short position of Multisector Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Multisector Bond.

Diversification Opportunities for Tax Exempt and Multisector Bond

0.77

Correlation Coefficient

Tax Exempt  Multisector Bond

Poor diversification

The 3 months correlation between Tax and Multisector is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond Fund and Multisector Bond Sma in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Multisector Bond Sma and Tax Exempt 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 Multisector Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Multisector Bond Sma has no effect on the direction of Tax Exempt i.e., Tax Exempt and Multisector Bond go up and down completely randomly.

Pair Corralation between Tax Exempt and Multisector Bond

Assuming the 90 days horizon Tax Exempt Bond Fund is expected to under-perform the Multisector Bond. But the mutual fund apears to be less risky and, when comparing its historical volatility, Tax Exempt Bond Fund is 1.25 times less risky than Multisector Bond. The mutual fund trades about -0.37 of its potential returns per unit of risk. The Multisector Bond Sma is currently generating about -0.16 of returns per unit of risk over similar time horizon. If you would invest  1,367  in Multisector Bond Sma on September 27, 2024 and sell it today you would lose (13.00) from holding Multisector Bond Sma or give up 0.95% of portfolio value over 90 days.

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

Tax Exempt Bond Fund  vs.  Multisector Bond Sma

Tax Exempt Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Multisector Bond Sma

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Multisector Bond Sma has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Multisector Bond 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 and Multisector Bond

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

The idea behind Tax Exempt Bond Fund and Multisector Bond Sma 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.