Correlation Between Small Capitalization and Municipal Bond
Can any of the company-specific risk be diversified away by investing in both Small Capitalization 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 Small Capitalization and Municipal Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Capitalization Portfolio and Municipal Bond Portfolio, you can compare the effects of market volatilities on Small Capitalization 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 Small Capitalization with a short position of Municipal Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Capitalization and Municipal Bond.
Diversification Opportunities for Small Capitalization and Municipal Bond
-0.42 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Small and Municipal is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio 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 Small Capitalization 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 Small Capitalization Portfolio 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 Small Capitalization i.e., Small Capitalization and Municipal Bond go up and down completely randomly.
Pair Corralation between Small Capitalization and Municipal Bond
Assuming the 90 days horizon Small Capitalization Portfolio is expected to generate 8.07 times more return on investment than Municipal Bond. However, Small Capitalization is 8.07 times more volatile than Municipal Bond Portfolio. It trades about 0.21 of its potential returns per unit of risk. Municipal Bond Portfolio is currently generating about 0.1 per unit of risk. If you would invest 112.00 in Small Capitalization Portfolio on August 25, 2024 and sell it today you would earn a total of 9.00 from holding Small Capitalization Portfolio or generate 8.04% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Capitalization Portfolio vs. Municipal Bond Portfolio
Performance |
| Timeline |
| Small Capitalization |
| Municipal Bond Portfolio |
Small Capitalization and Municipal Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Capitalization and Municipal Bond
The main advantage of trading using opposite Small Capitalization and Municipal Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Capitalization 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.| Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Fidelity Small Cap |
| Municipal Bond vs. Vanguard Intermediate Term Tax Exempt | Municipal Bond vs. Vanguard Intermediate Term Tax Exempt | Municipal Bond vs. Tax Exempt Bond | Municipal Bond vs. Tax Exempt 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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