Correlation Between Tax Exempt and Municipal Bond
Can any of the company-specific risk be diversified away by investing in both Tax Exempt and Municipal Bond 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 Tax Exempt and Municipal Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tax Exempt Bond and Municipal Bond Portfolio, you can compare the effects of market volatilities on Tax Exempt and Municipal Bond 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 Tax Exempt with a short position of Municipal Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Municipal Bond.
Diversification Opportunities for Tax Exempt and Municipal Bond
0.83 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Tax and Municipal is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and Municipal Bond Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Municipal Bond Portfolio and Tax Exempt 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 Tax Exempt Bond are associated (or correlated) with Municipal Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Municipal Bond Portfolio has no effect on the direction of Tax Exempt i.e., Tax Exempt and Municipal Bond go up and down completely randomly.
Pair Corralation between Tax Exempt and Municipal Bond
Assuming the 90 days horizon Tax Exempt Bond is expected to generate 1.43 times more return on investment than Municipal Bond. However, Tax Exempt is 1.43 times more volatile than Municipal Bond Portfolio. It trades about 0.15 of its potential returns per unit of risk. Municipal Bond Portfolio is currently generating about 0.11 per unit of risk. If you would invest 1,241 in Tax Exempt Bond on August 29, 2024 and sell it today you would earn a total of 12.00 from holding Tax Exempt Bond or generate 0.97% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Tax Exempt Bond vs. Municipal Bond Portfolio
Performance |
| Timeline |
| Tax Exempt Bond |
| Municipal Bond Portfolio |
Tax Exempt and Municipal Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Tax Exempt and Municipal Bond
The main advantage of trading using opposite Tax Exempt and Municipal Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax Exempt position performs unexpectedly, Municipal Bond 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 Municipal Bond will offset losses from the drop in Municipal Bond's long position.| Tax Exempt vs. Franklin Federal Tax Free | Tax Exempt vs. Thornburg Limited Term | Tax Exempt vs. T Rowe Price | Tax Exempt vs. Invesco International Growth |
| Municipal Bond vs. Salient Alternative Beta | Municipal Bond vs. Moderately Aggressive Balanced | Municipal Bond vs. Small Capitalization Portfolio | Municipal Bond vs. Small Capitalization Portfolio |
Check out your portfolio center.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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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