Correlation Between Large Cap and Municipal Bond

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

By analyzing existing cross correlation between Large Cap Value and Municipal Bond Portfolio, you can compare the effects of market volatilities on Large Cap and Municipal Bond 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 Large Cap with a short position of Municipal Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Municipal Bond.

Diversification Opportunities for Large Cap and Municipal Bond

0.1

Correlation Coefficient

Large Cap  Municipal Bond

Average diversification

The 3 months correlation between Large and Municipal is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Value and Municipal Bond Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Municipal Bond Portfolio and Large 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 Large Cap Value are associated (or correlated) with Municipal Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Municipal Bond Portfolio has no effect on the direction of Large Cap i.e., Large Cap and Municipal Bond go up and down completely randomly.

Pair Corralation between Large Cap and Municipal Bond

Assuming the 90 days horizon Large Cap Value is expected to under-perform the Municipal Bond. In addition to that, Large Cap is 5.77 times more volatile than Municipal Bond Portfolio. It trades about -0.02 of its total potential returns per unit of risk. Municipal Bond Portfolio is currently generating about -0.06 per unit of volatility. If you would invest  857.00  in Municipal Bond Portfolio on December 30, 2024 and sell it today you would lose (6.00) from holding Municipal Bond Portfolio or give up 0.7% of portfolio value over 90 days.

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

Large Cap Value  vs.  Municipal Bond Portfolio

Large Cap Value

Risk-Adjusted Performance

Very Weak

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

Municipal Bond Portfolio

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Large Cap and Municipal Bond

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

The idea behind Large Cap Value and Municipal Bond Portfolio 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.