Correlation Between Tax-managed and Tax Exempt

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

Diversification Opportunities for Tax-managed and Tax Exempt

-0.12

Correlation Coefficient

Tax-managed  Tax Exempt

Good diversification

The 3 months correlation between Tax-managed and Tax is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Large Cap 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 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 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 Tax-managed i.e., Tax-managed and Tax Exempt go up and down completely randomly.

Pair Corralation between Tax-managed and Tax Exempt

Assuming the 90 days horizon Tax Managed Large Cap is expected to generate 3.14 times more return on investment than Tax Exempt. However, Tax-managed is 3.14 times more volatile than Tax Exempt Bond. It trades about 0.18 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  7,390  in Tax Managed Large Cap on September 4, 2024 and sell it today you would earn a total of  599.00  from holding Tax Managed Large Cap or generate 8.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Tax Managed Large Cap  vs.  Tax Exempt Bond

Tax Managed Large

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Managed Large Cap are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Tax-managed may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, 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 Tax-managed and Tax Exempt

The main advantage of trading using opposite Tax-managed and Tax Exempt positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax-managed 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 Tax Managed Large Cap 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.

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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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.