Correlation Between Tax Exempt and Municipal Bond

Specify exactly 2 symbols:
Can any of the company-specific risk be diversified away by investing in both Tax Exempt 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 Tax Exempt and Municipal Bond 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 Municipal Bond Portfolio, you can compare the effects of market volatilities on Tax Exempt 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 Tax Exempt with a short position of Municipal Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Municipal Bond.

Diversification Opportunities for Tax Exempt and Municipal Bond

0.88
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Tax and Municipal is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and Municipal Bond Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Municipal Bond Portfolio 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 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 Portfolio has no effect on the direction of Tax Exempt i.e., Tax Exempt and Municipal Bond go up and down completely randomly.

Pair Corralation between Tax Exempt and Municipal Bond

Assuming the 90 days horizon Tax Exempt Bond is expected to generate 1.29 times more return on investment than Municipal Bond. However, Tax Exempt is 1.29 times more volatile than Municipal Bond Portfolio. It trades about -0.12 of its potential returns per unit of risk. Municipal Bond Portfolio is currently generating about -0.18 per unit of risk. If you would invest  1,235  in Tax Exempt Bond on February 27, 2024 and sell it today you would lose (11.00) from holding Tax Exempt Bond or give up 0.89% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Tax Exempt Bond  vs.  Municipal Bond Portfolio

 Performance 
       Timeline  
Tax Exempt Bond 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Tax Exempt Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Tax Exempt is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Municipal Bond Portfolio 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Municipal Bond Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Municipal Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Tax Exempt and Municipal Bond Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Tax Exempt and Municipal Bond

The main advantage of trading using opposite Tax Exempt and Municipal Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tax Exempt 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.
The idea behind Tax Exempt Bond and Municipal Bond 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.
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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.

Other Complementary Tools

Portfolio Rebalancing
Analyze risk-adjusted returns against different time horizons to find asset-allocation targets
Pattern Recognition
Use different Pattern Recognition models to time the market across multiple global exchanges
Stock Tickers
Use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites
Pair Correlation
Compare performance and examine fundamental relationship between any two equity instruments
Content Syndication
Quickly integrate customizable finance content to your own investment portal