Correlation Between Diversified Municipal and Tax Exempt

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

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

Diversification Opportunities for Diversified Municipal and Tax Exempt

0.95

Correlation Coefficient

Diversified Municipal  Tax Exempt

Almost no diversification

The 3 months correlation between Diversified and Tax is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Municipal Portfoli 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 Diversified 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 Diversified Municipal Portfolio 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 Diversified Municipal i.e., Diversified Municipal and Tax Exempt go up and down completely randomly.

Pair Corralation between Diversified Municipal and Tax Exempt

Assuming the 90 days horizon Diversified Municipal Portfolio is expected to generate 0.72 times more return on investment than Tax Exempt. However, Diversified Municipal Portfolio is 1.39 times less risky than Tax Exempt. It trades about 0.02 of its potential returns per unit of risk. Tax Exempt Bond is currently generating about -0.01 per unit of risk. If you would invest  1,375  in Diversified Municipal Portfolio on December 27, 2024 and sell it today you would earn a total of  3.00  from holding Diversified Municipal Portfolio or generate 0.22% return on investment over 90 days.

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

Diversified Municipal Portfoli  vs.  Tax Exempt Bond

Diversified Municipal

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified Municipal Portfolio are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Diversified Municipal 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

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 Diversified Municipal and Tax Exempt

The main advantage of trading using opposite Diversified Municipal and Tax Exempt positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diversified Municipal 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 Diversified Municipal Portfolio 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.