Correlation Between Morningstar Municipal and California Municipal
Can any of the company-specific risk be diversified away by investing in both Morningstar Municipal and California 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 Morningstar Municipal and California Municipal into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Morningstar Municipal Bond and California Municipal Fund, you can compare the effects of market volatilities on Morningstar Municipal and California 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 Morningstar Municipal with a short position of California Municipal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Municipal and California Municipal.
Diversification Opportunities for Morningstar Municipal and California Municipal
0.96 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Morningstar and California is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Municipal Bond and California Municipal Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California Municipal and Morningstar 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 Morningstar Municipal Bond are associated (or correlated) with California Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California Municipal has no effect on the direction of Morningstar Municipal i.e., Morningstar Municipal and California Municipal go up and down completely randomly.
Pair Corralation between Morningstar Municipal and California Municipal
Assuming the 90 days horizon Morningstar Municipal Bond is expected to generate 1.01 times more return on investment than California Municipal. However, Morningstar Municipal is 1.01 times more volatile than California Municipal Fund. It trades about 0.24 of its potential returns per unit of risk. California Municipal Fund is currently generating about 0.21 per unit of risk. If you would invest 995.00 in Morningstar Municipal Bond on August 30, 2024 and sell it today you would earn a total of 13.00 from holding Morningstar Municipal Bond or generate 1.31% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Morningstar Municipal Bond vs. California Municipal Fund
Performance |
| Timeline |
| Morningstar Municipal |
| California Municipal |
Morningstar Municipal and California Municipal Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Morningstar Municipal and California Municipal
The main advantage of trading using opposite Morningstar Municipal and California Municipal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Morningstar Municipal position performs unexpectedly, California 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 California Municipal will offset losses from the drop in California Municipal's long position.The idea behind Morningstar Municipal Bond and California Municipal Fund 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.
| California Municipal vs. Ishares Municipal Bond | California Municipal vs. Morningstar Municipal Bond | California Municipal vs. T Rowe Price | California Municipal vs. Intermediate Term Tax Free Bond |
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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