Can any of the company-specific risk be diversified away by investing in both Bank of America and Tax Exempt 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 Bank of America and Tax Exempt into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Bank of America and Tax Exempt Fund Of, you can compare the effects of market volatilities on Bank of America and Tax Exempt 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 Bank of America with a short position of Tax Exempt. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and Tax Exempt.
Diversification Opportunities for Bank of America and Tax Exempt
The 3 months correlation between Bank and Tax is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Tax Exempt Fund Of in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax Exempt Fund and Bank of America 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 Bank of America are associated (or correlated) with Tax Exempt. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax Exempt Fund has no effect on the direction of Bank of America i.e., Bank of America and Tax Exempt go up and down completely randomly.
Pair Corralation between Bank of America and Tax Exempt
Considering the 90-day investment horizon Bank of America is expected to generate 7.88 times more return on investment than Tax Exempt. However, Bank of America is 7.88 times more volatile than Tax Exempt Fund Of. It trades about 0.23 of its potential returns per unit of risk. Tax Exempt Fund Of is currently generating about -0.17 per unit of risk. If you would invest 3,769 in Bank of America on March 6, 2024 and sell it today you would earn a total of 219.00 from holding Bank of America or generate 5.81% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Bank of America exhibited solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days Tax Exempt Fund Of has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong 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.