Correlation Between Prudential Government and Diversified Municipal
Can any of the company-specific risk be diversified away by investing in both Prudential Government and Diversified 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 Prudential Government and Diversified Municipal into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Prudential Government Income and Diversified Municipal Portfolio, you can compare the effects of market volatilities on Prudential Government and Diversified 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 Prudential Government with a short position of Diversified Municipal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Prudential Government and Diversified Municipal.
Diversification Opportunities for Prudential Government and Diversified Municipal
0.82 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Prudential and Diversified is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Prudential Government Income and Diversified Municipal Portfoli in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Municipal and Prudential Government 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 Prudential Government Income are associated (or correlated) with Diversified Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Municipal has no effect on the direction of Prudential Government i.e., Prudential Government and Diversified Municipal go up and down completely randomly.
Pair Corralation between Prudential Government and Diversified Municipal
Assuming the 90 days horizon Prudential Government Income is expected to generate 2.21 times more return on investment than Diversified Municipal. However, Prudential Government is 2.21 times more volatile than Diversified Municipal Portfolio. It trades about 0.06 of its potential returns per unit of risk. Diversified Municipal Portfolio is currently generating about 0.11 per unit of risk. If you would invest 782.00 in Prudential Government Income on August 29, 2024 and sell it today you would earn a total of 4.00 from holding Prudential Government Income or generate 0.51% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.65% |
| Values | Daily Returns |
Prudential Government Income vs. Diversified Municipal Portfoli
Performance |
| Timeline |
| Prudential Government |
| Diversified Municipal |
Prudential Government and Diversified Municipal Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Prudential Government and Diversified Municipal
The main advantage of trading using opposite Prudential Government and Diversified Municipal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Prudential Government position performs unexpectedly, Diversified 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 Diversified Municipal will offset losses from the drop in Diversified Municipal's long position.The idea behind Prudential Government Income and Diversified Municipal Portfolio 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.
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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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