Correlation Between Vanguard Limited-term and Diversified Municipal
Can any of the company-specific risk be diversified away by investing in both Vanguard Limited-term and Diversified Municipal 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 Vanguard Limited-term and Diversified Municipal into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Limited Term Tax Exempt and Diversified Municipal Portfolio, you can compare the effects of market volatilities on Vanguard Limited-term and Diversified Municipal 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 Vanguard Limited-term with a short position of Diversified Municipal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Limited-term and Diversified Municipal.
Diversification Opportunities for Vanguard Limited-term and Diversified Municipal
0.82 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Vanguard and Diversified is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Limited Term Tax Exem and Diversified Municipal Portfoli in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Municipal and Vanguard Limited-term 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 Vanguard Limited Term Tax Exempt are associated (or correlated) with Diversified Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Municipal has no effect on the direction of Vanguard Limited-term i.e., Vanguard Limited-term and Diversified Municipal go up and down completely randomly.
Pair Corralation between Vanguard Limited-term and Diversified Municipal
Assuming the 90 days horizon Vanguard Limited-term is expected to generate 1.11 times less return on investment than Diversified Municipal. But when comparing it to its historical volatility, Vanguard Limited Term Tax Exempt is 1.38 times less risky than Diversified Municipal. It trades about 0.14 of its potential returns per unit of risk. Diversified Municipal Portfolio is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 1,345 in Diversified Municipal Portfolio on September 2, 2024 and sell it today you would earn a total of 55.00 from holding Diversified Municipal Portfolio or generate 4.09% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Vanguard Limited Term Tax Exem vs. Diversified Municipal Portfoli
Performance |
| Timeline |
| Vanguard Limited Term |
| Diversified Municipal |
Vanguard Limited-term and Diversified Municipal Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Vanguard Limited-term and Diversified Municipal
The main advantage of trading using opposite Vanguard Limited-term and Diversified Municipal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Limited-term position performs unexpectedly, Diversified Municipal 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 Diversified Municipal will offset losses from the drop in Diversified Municipal's long position.The idea behind Vanguard Limited Term Tax Exempt and Diversified Municipal Portfolio 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.
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