Correlation Between Tax-exempt Bond and Short Duration
Can any of the company-specific risk be diversified away by investing in both Tax-exempt Bond and Short Duration 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 Bond and Short Duration into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tax Exempt Bond Fund and Short Duration Bond, you can compare the effects of market volatilities on Tax-exempt Bond and Short Duration 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 Bond with a short position of Short Duration. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-exempt Bond and Short Duration.
Diversification Opportunities for Tax-exempt Bond and Short Duration
0.73 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Tax-exempt and Short is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond Fund and Short Duration Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration Bond and Tax-exempt Bond 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 Fund are associated (or correlated) with Short Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Duration Bond has no effect on the direction of Tax-exempt Bond i.e., Tax-exempt Bond and Short Duration go up and down completely randomly.
Pair Corralation between Tax-exempt Bond and Short Duration
Assuming the 90 days horizon Tax Exempt Bond Fund is expected to generate 1.26 times more return on investment than Short Duration. However, Tax-exempt Bond is 1.26 times more volatile than Short Duration Bond. It trades about 0.17 of its potential returns per unit of risk. Short Duration Bond is currently generating about 0.16 per unit of risk. If you would invest 2,025 in Tax Exempt Bond Fund on August 25, 2024 and sell it today you would earn a total of 176.00 from holding Tax Exempt Bond Fund or generate 8.69% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Tax Exempt Bond Fund vs. Short Duration Bond
Performance |
| Timeline |
| Tax Exempt Bond |
| Short Duration Bond |
Tax-exempt Bond and Short Duration Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Tax-exempt Bond and Short Duration
The main advantage of trading using opposite Tax-exempt Bond and Short Duration positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax-exempt Bond position performs unexpectedly, Short Duration 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 Short Duration will offset losses from the drop in Short Duration's long position.| Tax-exempt Bond vs. Franklin Gold Precious | Tax-exempt Bond vs. Fidelity Advisor Gold | Tax-exempt Bond vs. Wells Fargo Advantage | Tax-exempt Bond vs. Gabelli Gold Fund |
| Short Duration vs. Short Real Estate | Short Duration vs. Short Term Government Fund | Short Duration vs. Short Term Bond Fund | Short Duration vs. Short Duration 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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