Correlation Between Intermediate-term and Energy Fund

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

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

Diversification Opportunities for Intermediate-term and Energy Fund

0.04

Correlation Coefficient

Intermediate-term  Energy Fund

Significant diversification

The 3 months correlation between Intermediate-term and Energy is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Term Tax Free Bon and Energy Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Fund Class and Intermediate-term 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 Intermediate Term Tax Free Bond are associated (or correlated) with Energy Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Fund Class has no effect on the direction of Intermediate-term i.e., Intermediate-term and Energy Fund go up and down completely randomly.

Pair Corralation between Intermediate-term and Energy Fund

Assuming the 90 days horizon Intermediate-term is expected to generate 2.03 times less return on investment than Energy Fund. But when comparing it to its historical volatility, Intermediate Term Tax Free Bond is 6.48 times less risky than Energy Fund. It trades about 0.07 of its potential returns per unit of risk. Energy Fund Class is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  19,891  in Energy Fund Class on December 2, 2024 and sell it today you would earn a total of  2,030  from holding Energy Fund Class or generate 10.21% return on investment over 90 days.

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

Intermediate Term Tax Free Bon  vs.  Energy Fund Class

Intermediate Term Tax

Risk-Adjusted Performance

Very Weak

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

Energy Fund Class

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Intermediate-term and Energy Fund

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

The idea behind Intermediate Term Tax Free Bond and Energy Fund Class 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.