Correlation Between Short Duration and Tax-exempt Bond
Can any of the company-specific risk be diversified away by investing in both Short Duration and Tax-exempt 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 Short Duration and Tax-exempt Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Short Duration Bond and Tax Exempt Bond Fund, you can compare the effects of market volatilities on Short Duration and Tax-exempt 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 Short Duration with a short position of Tax-exempt Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Duration and Tax-exempt Bond.
Diversification Opportunities for Short Duration and Tax-exempt Bond
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Short and Tax-exempt is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Short Duration Bond and Tax Exempt Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax Exempt Bond and Short Duration 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 Duration Bond are associated (or correlated) with Tax-exempt Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax Exempt Bond has no effect on the direction of Short Duration i.e., Short Duration and Tax-exempt Bond go up and down completely randomly.
Pair Corralation between Short Duration and Tax-exempt Bond
Assuming the 90 days horizon Short Duration is expected to generate 7.22 times less return on investment than Tax-exempt Bond. But when comparing it to its historical volatility, Short Duration Bond is 2.04 times less risky than Tax-exempt Bond. It trades about 0.05 of its potential returns per unit of risk. Tax Exempt Bond Fund is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 2,186 in Tax Exempt Bond Fund on August 29, 2024 and sell it today you would earn a total of 17.00 from holding Tax Exempt Bond Fund or generate 0.78% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Short Duration Bond vs. Tax Exempt Bond Fund
Performance |
| Timeline |
| Short Duration Bond |
| Tax Exempt Bond |
Short Duration and Tax-exempt Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Short Duration and Tax-exempt Bond
The main advantage of trading using opposite Short Duration and Tax-exempt Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short Duration position performs unexpectedly, Tax-exempt 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 Tax-exempt Bond will offset losses from the drop in Tax-exempt Bond's long position.| Short Duration vs. International Developed Markets | Short Duration vs. Global Real Estate | Short Duration vs. Global Real Estate | Short Duration vs. Global Real Estate |
| Tax-exempt Bond vs. Qs Small Capitalization | Tax-exempt Bond vs. Ab Small Cap | Tax-exempt Bond vs. Fisher Small Cap | Tax-exempt Bond vs. Vanguard Small Cap Index |
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 Stocks Directory module to find actively traded stocks across global markets.
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