Correlation Between Tax Exempt and Income Fund

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

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

Diversification Opportunities for Tax Exempt and Income Fund

0.55

Correlation Coefficient

Tax Exempt  Income Fund

Very weak diversification

The 3 months correlation between Tax and Income is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Fund Of and Income Fund Of in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Income Fund and Tax Exempt 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 Tax Exempt Fund Of are associated (or correlated) with Income Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Income Fund has no effect on the direction of Tax Exempt i.e., Tax Exempt and Income Fund go up and down completely randomly.

Pair Corralation between Tax Exempt and Income Fund

Assuming the 90 days horizon Tax Exempt Fund Of is expected to under-perform the Income Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Tax Exempt Fund Of is 2.19 times less risky than Income Fund. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Income Fund Of is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,425  in Income Fund Of on December 30, 2024 and sell it today you would earn a total of  105.00  from holding Income Fund Of or generate 4.33% return on investment over 90 days.

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

Tax Exempt Fund Of  vs.  Income Fund Of

Tax Exempt Fund

Risk-Adjusted Performance

Very Weak

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

Income Fund

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Income Fund Of are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Income Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Tax Exempt and Income Fund

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

The idea behind Tax Exempt Fund Of and Income Fund Of 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.