Correlation Between California Municipal and Capital Growth

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

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

Diversification Opportunities for California Municipal and Capital Growth

0.56

Correlation Coefficient

California Municipal  Capital Growth

Very weak diversification

The 3 months correlation between California and Capital is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding California Municipal Portfolio and Capital Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital Growth and California Municipal 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 California Municipal Portfolio are associated (or correlated) with Capital Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital Growth has no effect on the direction of California Municipal i.e., California Municipal and Capital Growth go up and down completely randomly.

Pair Corralation between California Municipal and Capital Growth

Assuming the 90 days horizon California Municipal Portfolio is expected to under-perform the Capital Growth. But the mutual fund apears to be less risky and, when comparing its historical volatility, California Municipal Portfolio is 4.46 times less risky than Capital Growth. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Capital Growth Fund is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,276  in Capital Growth Fund on October 26, 2024 and sell it today you would earn a total of  26.00  from holding Capital Growth Fund or generate 2.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	94.74%
Values	Daily Returns

California Municipal Portfolio  vs.  Capital Growth Fund

California Municipal

Risk-Adjusted Performance

0 of 100

Very Weak

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

Capital Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with California Municipal and Capital Growth

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

The idea behind California Municipal Portfolio and Capital Growth 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.