Correlation Between Ultra Short and Short Term

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

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

Diversification Opportunities for Ultra Short and Short Term

0.69

Correlation Coefficient

Ultra Short  Short Term

Poor diversification

The 3 months correlation between Ultra and Short is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Ultra Short Term Municipal and Short Term Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Municipal and Ultra Short 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 Ultra Short Term Municipal are associated (or correlated) with Short Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Municipal has no effect on the direction of Ultra Short i.e., Ultra Short and Short Term go up and down completely randomly.

Pair Corralation between Ultra Short and Short Term

Assuming the 90 days horizon Ultra Short Term Municipal is expected to generate 0.82 times more return on investment than Short Term. However, Ultra Short Term Municipal is 1.22 times less risky than Short Term. It trades about 0.17 of its potential returns per unit of risk. Short Term Municipal Bond is currently generating about 0.08 per unit of risk. If you would invest  959.00  in Ultra Short Term Municipal on September 13, 2024 and sell it today you would earn a total of  7.00  from holding Ultra Short Term Municipal or generate 0.73% return on investment over 90 days.

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

Ultra Short Term Municipal  vs.  Short Term Municipal Bond

Ultra Short Term

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Short Term Municipal are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Ultra Short is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Term Municipal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Municipal Bond are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short Term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Ultra Short and Short Term

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

The idea behind Ultra Short Term Municipal and Short Term Municipal 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .