Correlation Between Municipal Bond and Large Cap

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

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

Diversification Opportunities for Municipal Bond and Large Cap

0.15

Correlation Coefficient

Municipal Bond  Large Cap

Average diversification

The 3 months correlation between Municipal and Large is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Municipal Bond Fund and Large Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Equity and Municipal Bond 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 Municipal Bond Fund are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Equity has no effect on the direction of Municipal Bond i.e., Municipal Bond and Large Cap go up and down completely randomly.

Pair Corralation between Municipal Bond and Large Cap

Assuming the 90 days horizon Municipal Bond Fund is expected to under-perform the Large Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Municipal Bond Fund is 2.53 times less risky than Large Cap. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Large Cap Equity is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  2,666  in Large Cap Equity on October 21, 2024 and sell it today you would earn a total of  11.00  from holding Large Cap Equity or generate 0.41% return on investment over 90 days.

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

Municipal Bond Fund  vs.  Large Cap Equity

Municipal Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Municipal Bond Fund 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.

Large Cap Equity

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Municipal Bond and Large Cap

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

The idea behind Municipal Bond Fund and Large Cap Equity 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.