Correlation Between Tax Exempt and American Funds
Can any of the company-specific risk be diversified away by investing in both Tax Exempt and American Funds 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 and American Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tax Exempt Bond and American Funds Inflation, you can compare the effects of market volatilities on Tax Exempt and American Funds 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 with a short position of American Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and American Funds.
Diversification Opportunities for Tax Exempt and American Funds
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Tax and American is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and American Funds Inflation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Inflation and Tax Exempt 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 are associated (or correlated) with American Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Funds Inflation has no effect on the direction of Tax Exempt i.e., Tax Exempt and American Funds go up and down completely randomly.
Pair Corralation between Tax Exempt and American Funds
Assuming the 90 days horizon Tax Exempt Bond is expected to generate 1.52 times more return on investment than American Funds. However, Tax Exempt is 1.52 times more volatile than American Funds Inflation. It trades about 0.15 of its potential returns per unit of risk. American Funds Inflation is currently generating about -0.17 per unit of risk. If you would invest 1,237 in Tax Exempt Bond on August 24, 2024 and sell it today you would earn a total of 12.00 from holding Tax Exempt Bond or generate 0.97% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.65% |
| Values | Daily Returns |
Tax Exempt Bond vs. American Funds Inflation
Performance |
| Timeline |
| Tax Exempt Bond |
| American Funds Inflation |
Tax Exempt and American Funds Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Tax Exempt and American Funds
The main advantage of trading using opposite Tax Exempt and American Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax Exempt position performs unexpectedly, American Funds 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 American Funds will offset losses from the drop in American Funds' long position.| Tax Exempt vs. Pace Municipal Fixed | Tax Exempt vs. Multisector Bond Sma | Tax Exempt vs. Morningstar Defensive Bond | Tax Exempt vs. Versatile Bond Portfolio |
| American Funds vs. Vanguard Inflation Protected Securities | American Funds vs. American Funds Inflation | American Funds vs. American Funds Inflation | American Funds vs. American Funds Inflation |
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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.
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