Correlation Between Tennessee Tax-free and Alabama Tax-free
Can any of the company-specific risk be diversified away by investing in both Tennessee Tax-free and Alabama Tax-free 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 Tennessee Tax-free and Alabama Tax-free into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tennessee Tax Free Income and Alabama Tax Free Income, you can compare the effects of market volatilities on Tennessee Tax-free and Alabama Tax-free 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 Tennessee Tax-free with a short position of Alabama Tax-free. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tennessee Tax-free and Alabama Tax-free.
Diversification Opportunities for Tennessee Tax-free and Alabama Tax-free
0.99 | Correlation Coefficient |
No risk reduction
The 3 months correlation between Tennessee and Alabama is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Tennessee Tax Free Income and Alabama Tax Free Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alabama Tax Free and Tennessee Tax-free 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 Tennessee Tax Free Income are associated (or correlated) with Alabama Tax-free. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alabama Tax Free has no effect on the direction of Tennessee Tax-free i.e., Tennessee Tax-free and Alabama Tax-free go up and down completely randomly.
Pair Corralation between Tennessee Tax-free and Alabama Tax-free
Assuming the 90 days horizon Tennessee Tax-free is expected to generate 1.14 times less return on investment than Alabama Tax-free. But when comparing it to its historical volatility, Tennessee Tax Free Income is 1.04 times less risky than Alabama Tax-free. It trades about 0.17 of its potential returns per unit of risk. Alabama Tax Free Income is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest 1,137 in Alabama Tax Free Income on August 28, 2024 and sell it today you would earn a total of 16.00 from holding Alabama Tax Free Income or generate 1.41% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Tennessee Tax Free Income vs. Alabama Tax Free Income
Performance |
| Timeline |
| Tennessee Tax Free |
| Alabama Tax Free |
Tennessee Tax-free and Alabama Tax-free Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Tennessee Tax-free and Alabama Tax-free
The main advantage of trading using opposite Tennessee Tax-free and Alabama Tax-free positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tennessee Tax-free position performs unexpectedly, Alabama Tax-free 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 Alabama Tax-free will offset losses from the drop in Alabama Tax-free's long position.The idea behind Tennessee Tax Free Income and Alabama Tax Free Income pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.
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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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.
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