Correlation Between Tax-managed and Rising Rates

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

By analyzing existing cross correlation between Tax Managed Large Cap and Rising Rates Opportunity, you can compare the effects of market volatilities on Tax-managed and Rising Rates 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-managed with a short position of Rising Rates. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-managed and Rising Rates.

Diversification Opportunities for Tax-managed and Rising Rates

0.51

Correlation Coefficient

Tax-managed  Rising Rates

Very weak diversification

The 3 months correlation between Tax-managed and Rising is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Large Cap and Rising Rates Opportunity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rising Rates Opportunity and Tax-managed 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 Managed Large Cap are associated (or correlated) with Rising Rates. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rising Rates Opportunity has no effect on the direction of Tax-managed i.e., Tax-managed and Rising Rates go up and down completely randomly.

Pair Corralation between Tax-managed and Rising Rates

Assuming the 90 days horizon Tax Managed Large Cap is expected to under-perform the Rising Rates. But the mutual fund apears to be less risky and, when comparing its historical volatility, Tax Managed Large Cap is 1.01 times less risky than Rising Rates. The mutual fund trades about -0.11 of its potential returns per unit of risk. The Rising Rates Opportunity is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  3,935  in Rising Rates Opportunity on December 24, 2024 and sell it today you would lose (135.00) from holding Rising Rates Opportunity or give up 3.43% of portfolio value over 90 days.

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

Tax Managed Large Cap  vs.  Rising Rates Opportunity

Tax Managed Large

Risk-Adjusted Performance

Very Weak

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

Rising Rates Opportunity

Risk-Adjusted Performance

Very Weak

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

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

The idea behind Tax Managed Large Cap and Rising Rates Opportunity 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.