Correlation Between Small Capitalization and Municipal Bond

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

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

Diversification Opportunities for Small Capitalization and Municipal Bond

-0.17

Correlation Coefficient

Small Capitalization  Municipal Bond

Good diversification

The 3 months correlation between Small and Municipal is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio 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 Small Capitalization 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 Small Capitalization Portfolio 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 Small Capitalization i.e., Small Capitalization and Municipal Bond go up and down completely randomly.

Pair Corralation between Small Capitalization and Municipal Bond

Assuming the 90 days horizon Small Capitalization Portfolio is expected to under-perform the Municipal Bond. In addition to that, Small Capitalization is 10.6 times more volatile than Municipal Bond Portfolio. It trades about -0.09 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 Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Small Capitalization Portfolio  vs.  Municipal Bond Portfolio

Small Capitalization

Risk-Adjusted Performance

Very Weak

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

The main advantage of trading using opposite Small Capitalization and Municipal Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Capitalization 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 Small Capitalization Portfolio 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.