Correlation Between Small Cap and Municipal Bond
Can any of the company-specific risk be diversified away by investing in both Small Cap 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 Cap 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 Cap Stock and Municipal Bond Fund, you can compare the effects of market volatilities on Small Cap 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 Cap with a short position of Municipal Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Municipal Bond.
Diversification Opportunities for Small Cap and Municipal Bond
-0.05 | Correlation Coefficient |
Good diversification
The 3 months correlation between Small and Municipal is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Municipal Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Municipal Bond and Small Cap 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 Cap Stock 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 has no effect on the direction of Small Cap i.e., Small Cap and Municipal Bond go up and down completely randomly.
Pair Corralation between Small Cap and Municipal Bond
Assuming the 90 days horizon Small Cap Stock is expected to generate 6.08 times more return on investment than Municipal Bond. However, Small Cap is 6.08 times more volatile than Municipal Bond Fund. It trades about 0.04 of its potential returns per unit of risk. Municipal Bond Fund is currently generating about 0.08 per unit of risk. If you would invest 1,246 in Small Cap Stock on September 3, 2024 and sell it today you would earn a total of 283.00 from holding Small Cap Stock or generate 22.71% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Stock vs. Municipal Bond Fund
Performance |
| Timeline |
| Small Cap Stock |
| Municipal Bond |
Small Cap and Municipal Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Municipal Bond
The main advantage of trading using opposite Small Cap and Municipal Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap 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 Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index |
| Municipal Bond vs. Commodities Strategy Fund | Municipal Bond vs. Small Cap Stock | Municipal Bond vs. Balanced Fund Investor | Municipal Bond vs. Omni Small Cap Value |
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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.
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