Correlation Between Tax Exempt and Schwab Treasury

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Can any of the company-specific risk be diversified away by investing in both Tax Exempt and Schwab Treasury 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 Schwab Treasury 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 Schwab Treasury Inflation, you can compare the effects of market volatilities on Tax Exempt and Schwab Treasury 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 Schwab Treasury. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Schwab Treasury.

Diversification Opportunities for Tax Exempt and Schwab Treasury

0.78
  Correlation Coefficient

Poor diversification

The 3 months correlation between Tax and Schwab is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond Fund and Schwab Treasury Inflation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Treasury Inflation 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 Schwab Treasury. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Treasury Inflation has no effect on the direction of Tax Exempt i.e., Tax Exempt and Schwab Treasury go up and down completely randomly.

Pair Corralation between Tax Exempt and Schwab Treasury

Assuming the 90 days horizon Tax Exempt Bond Fund is expected to generate 0.46 times more return on investment than Schwab Treasury. However, Tax Exempt Bond Fund is 2.15 times less risky than Schwab Treasury. It trades about 0.07 of its potential returns per unit of risk. Schwab Treasury Inflation is currently generating about 0.03 per unit of risk. If you would invest  2,060  in Tax Exempt Bond Fund on September 26, 2024 and sell it today you would earn a total of  119.00  from holding Tax Exempt Bond Fund or generate 5.78% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy99.8%
ValuesDaily Returns

Tax Exempt Bond Fund  vs.  Schwab Treasury Inflation

 Performance 
       Timeline  
Tax Exempt Bond 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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.
Schwab Treasury Inflation 

Risk-Adjusted Performance

0 of 100

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

Tax Exempt and Schwab Treasury Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Tax Exempt and Schwab Treasury

The main advantage of trading using opposite Tax Exempt and Schwab Treasury positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax Exempt position performs unexpectedly, Schwab Treasury 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 Schwab Treasury will offset losses from the drop in Schwab Treasury's long position.
The idea behind Tax Exempt Bond Fund and Schwab Treasury Inflation 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.

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