Correlation Between Vanguard California and California Tax-free

Can any of the company-specific risk be diversified away by investing in both Vanguard California and California 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 Vanguard California and California Tax-free into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Vanguard California Intermediate Term and California Tax Free Income, you can compare the effects of market volatilities on Vanguard California and California 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 Vanguard California with a short position of California Tax-free. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard California and California Tax-free.

Diversification Opportunities for Vanguard California and California Tax-free

0.98

Correlation Coefficient

Vanguard California  California Tax-free

Almost no diversification

The 3 months correlation between Vanguard and California is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard California Intermedia and California Tax Free Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California Tax Free and Vanguard California 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 California Intermediate Term are associated (or correlated) with California 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 California Tax Free has no effect on the direction of Vanguard California i.e., Vanguard California and California Tax-free go up and down completely randomly.

Pair Corralation between Vanguard California and California Tax-free

Assuming the 90 days horizon Vanguard California Intermediate Term is expected to generate 1.31 times more return on investment than California Tax-free. However, Vanguard California is 1.31 times more volatile than California Tax Free Income. It trades about -0.11 of its potential returns per unit of risk. California Tax Free Income is currently generating about -0.17 per unit of risk. If you would invest  1,133  in Vanguard California Intermediate Term on February 28, 2024 and sell it today you would lose (11.00) from holding Vanguard California Intermediate Term or give up 0.97% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Vanguard California Intermedia  vs.  California Tax Free Income

Vanguard California

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard California Intermediate Term has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Vanguard California is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

California Tax Free

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Vanguard California and California Tax-free

The main advantage of trading using opposite Vanguard California and California Tax-free positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard California position performs unexpectedly, California 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 California Tax-free will offset losses from the drop in California Tax-free's long position.

The idea behind Vanguard California Intermediate Term and California 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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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.