Correlation Between Tax Managed and New Economy

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

By analyzing existing cross correlation between Tax Managed Mid Small and New Economy Fund, you can compare the effects of market volatilities on Tax Managed and New Economy 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 New Economy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Managed and New Economy.

Diversification Opportunities for Tax Managed and New Economy

0.76

Correlation Coefficient

Tax Managed  New Economy

Poor diversification

The 3 months correlation between Tax and New is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Mid Small and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund 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 Mid Small are associated (or correlated) with New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of Tax Managed i.e., Tax Managed and New Economy go up and down completely randomly.

Pair Corralation between Tax Managed and New Economy

Assuming the 90 days horizon Tax Managed Mid Small is expected to generate 0.59 times more return on investment than New Economy. However, Tax Managed Mid Small is 1.71 times less risky than New Economy. It trades about -0.15 of its potential returns per unit of risk. New Economy Fund is currently generating about -0.13 per unit of risk. If you would invest  4,500  in Tax Managed Mid Small on October 7, 2024 and sell it today you would lose (300.00) from holding Tax Managed Mid Small or give up 6.67% of portfolio value over 90 days.

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

Tax Managed Mid Small  vs.  New Economy Fund

Tax Managed Mid

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tax Managed Mid Small 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.

New Economy Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Economy Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, New Economy 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 New Economy

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

The idea behind Tax Managed Mid Small and New Economy Fund 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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.