Correlation Between Municipal Bond and Large Cap
Can any of the company-specific risk be diversified away by investing in both Municipal Bond and Large Cap 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 Municipal Bond and Large Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Municipal Bond Fund and Large Cap Equity, you can compare the effects of market volatilities on Municipal Bond and Large Cap 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 Municipal Bond with a short position of Large Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Municipal Bond and Large Cap.
Diversification Opportunities for Municipal Bond and Large Cap
0.1 | Correlation Coefficient |
Average diversification
The 3 months correlation between Municipal and Large is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Municipal Bond Fund and Large Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Equity and Municipal 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 Municipal Bond Fund are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Equity has no effect on the direction of Municipal Bond i.e., Municipal Bond and Large Cap go up and down completely randomly.
Pair Corralation between Municipal Bond and Large Cap
Assuming the 90 days horizon Municipal Bond is expected to generate 9.15 times less return on investment than Large Cap. But when comparing it to its historical volatility, Municipal Bond Fund is 3.49 times less risky than Large Cap. It trades about 0.03 of its potential returns per unit of risk. Large Cap Equity is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 1,998 in Large Cap Equity on October 28, 2024 and sell it today you would earn a total of 679.00 from holding Large Cap Equity or generate 33.98% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Municipal Bond Fund vs. Large Cap Equity
Performance |
| Timeline |
| Municipal Bond |
| Large Cap Equity |
Municipal Bond and Large Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Municipal Bond and Large Cap
The main advantage of trading using opposite Municipal Bond and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Municipal Bond position performs unexpectedly, Large Cap 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 Large Cap will offset losses from the drop in Large Cap's long position.| Municipal Bond vs. Guggenheim High Yield | Municipal Bond vs. Victory High Yield | Municipal Bond vs. Jpmorgan High Yield | Municipal Bond vs. Dunham High Yield |
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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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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