Correlation Between Mid Cap and Tax Exempt

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

By analyzing existing cross correlation between Mid Cap 15x Strategy and Tax Exempt Bond, you can compare the effects of market volatilities on Mid Cap 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 Mid Cap with a short position of Tax Exempt. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Tax Exempt.

Diversification Opportunities for Mid Cap and Tax Exempt

0.18

Correlation Coefficient

Mid Cap  Tax Exempt

Average diversification

The 3 months correlation between Mid and Tax is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap 15x Strategy 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 Mid Cap 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 Mid Cap 15x Strategy 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 Mid Cap i.e., Mid Cap and Tax Exempt go up and down completely randomly.

Pair Corralation between Mid Cap and Tax Exempt

Assuming the 90 days horizon Mid Cap 15x Strategy is expected to generate 7.06 times more return on investment than Tax Exempt. However, Mid Cap is 7.06 times more volatile than Tax Exempt Bond. It trades about 0.05 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  9,694  in Mid Cap 15x Strategy on September 19, 2024 and sell it today you would earn a total of  3,414  from holding Mid Cap 15x Strategy or generate 35.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Mid Cap 15x Strategy  vs.  Tax Exempt Bond

Mid Cap 15x

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days Mid Cap 15x Strategy has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Tax Exempt Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tax Exempt Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, 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 Mid Cap and Tax Exempt

The main advantage of trading using opposite Mid Cap and Tax Exempt positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Cap 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 Mid Cap 15x Strategy 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.