Correlation Between Government Securities and Morningstar Municipal

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

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

Diversification Opportunities for Government Securities and Morningstar Municipal

0.56

Correlation Coefficient

Government Securities  Morningstar Municipal

Very weak diversification

The 3 months correlation between Government and Morningstar is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Government Securities Fund and Morningstar Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morningstar Municipal and Government Securities 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 Government Securities Fund are associated (or correlated) with Morningstar Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morningstar Municipal has no effect on the direction of Government Securities i.e., Government Securities and Morningstar Municipal go up and down completely randomly.

Pair Corralation between Government Securities and Morningstar Municipal

Assuming the 90 days horizon Government Securities Fund is expected to under-perform the Morningstar Municipal. In addition to that, Government Securities is 1.24 times more volatile than Morningstar Municipal Bond. It trades about -0.05 of its total potential returns per unit of risk. Morningstar Municipal Bond is currently generating about 0.08 per unit of volatility. If you would invest  998.00  in Morningstar Municipal Bond on September 3, 2024 and sell it today you would earn a total of  10.00  from holding Morningstar Municipal Bond or generate 1.0% return on investment over 90 days.

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

Government Securities Fund  vs.  Morningstar Municipal Bond

Government Securities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Morningstar Municipal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Municipal Bond are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Morningstar 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 Government Securities and Morningstar Municipal

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

The idea behind Government Securities Fund and Morningstar 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.