Correlation Between Short-term Municipal and Vanguard Small-cap

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

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

Diversification Opportunities for Short-term Municipal and Vanguard Small-cap

-0.54

Correlation Coefficient

Short-term Municipal  Vanguard Small-cap

Excellent diversification

The 3 months correlation between Short-term and Vanguard is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Municipal Bond and Vanguard Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and Short-term Municipal 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 Municipal Bond are associated (or correlated) with Vanguard Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Small Cap has no effect on the direction of Short-term Municipal i.e., Short-term Municipal and Vanguard Small-cap go up and down completely randomly.

Pair Corralation between Short-term Municipal and Vanguard Small-cap

Assuming the 90 days horizon Short Term Municipal Bond is expected to generate 0.08 times more return on investment than Vanguard Small-cap. However, Short Term Municipal Bond is 13.01 times less risky than Vanguard Small-cap. It trades about 0.15 of its potential returns per unit of risk. Vanguard Small Cap Value is currently generating about -0.06 per unit of risk. If you would invest  959.00  in Short Term Municipal Bond on December 27, 2024 and sell it today you would earn a total of  7.00  from holding Short Term Municipal Bond or generate 0.73% return on investment over 90 days.

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

Short Term Municipal Bond  vs.  Vanguard Small Cap Value

Short Term Municipal

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Municipal Bond are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary indicators, Short-term Municipal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Vanguard Small-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 Short-term Municipal and Vanguard Small-cap

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

The idea behind Short Term Municipal Bond and Vanguard Small Cap Value 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.