Correlation Between Short-term Government and Ishares Municipal

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

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

Diversification Opportunities for Short-term Government and Ishares Municipal

0.61

Correlation Coefficient

Short-term Government  Ishares Municipal

Poor diversification

The 3 months correlation between Short-term and Ishares is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Ishares Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ishares Municipal Bond and Short-term Government 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 Short Term Government Fund are associated (or correlated) with Ishares Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ishares Municipal Bond has no effect on the direction of Short-term Government i.e., Short-term Government and Ishares Municipal go up and down completely randomly.

Pair Corralation between Short-term Government and Ishares Municipal

Assuming the 90 days horizon Short Term Government Fund is expected to under-perform the Ishares Municipal. But the mutual fund apears to be less risky and, when comparing its historical volatility, Short Term Government Fund is 3.01 times less risky than Ishares Municipal. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Ishares Municipal Bond is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,093  in Ishares Municipal Bond on October 7, 2024 and sell it today you would earn a total of  8.00  from holding Ishares Municipal Bond or generate 0.73% return on investment over 90 days.

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

Short Term Government Fund  vs.  Ishares Municipal Bond

Short Term Government

Risk-Adjusted Performance

0 of 100

Very Weak

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

Ishares Municipal Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Short-term Government and Ishares Municipal

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

The idea behind Short Term Government Fund and Ishares Municipal 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.