Correlation Between Tax-exempt High and Balanced Strategy

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

By analyzing existing cross correlation between Tax Exempt High Yield and Balanced Strategy Fund, you can compare the effects of market volatilities on Tax-exempt High and Balanced Strategy 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 High with a short position of Balanced Strategy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-exempt High and Balanced Strategy.

Diversification Opportunities for Tax-exempt High and Balanced Strategy

0.53

Correlation Coefficient

Tax-exempt High  Balanced Strategy

Very weak diversification

The 3 months correlation between Tax-exempt and Balanced is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt High Yield and Balanced Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Strategy and Tax-exempt High 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 High Yield are associated (or correlated) with Balanced Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Strategy has no effect on the direction of Tax-exempt High i.e., Tax-exempt High and Balanced Strategy go up and down completely randomly.

Pair Corralation between Tax-exempt High and Balanced Strategy

Assuming the 90 days horizon Tax Exempt High Yield is expected to under-perform the Balanced Strategy. But the mutual fund apears to be less risky and, when comparing its historical volatility, Tax Exempt High Yield is 1.29 times less risky than Balanced Strategy. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Balanced Strategy Fund is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,130  in Balanced Strategy Fund on February 16, 2025 and sell it today you would earn a total of  1.00  from holding Balanced Strategy Fund or generate 0.09% return on investment over 90 days.

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

Tax Exempt High Yield  vs.  Balanced Strategy Fund

Tax Exempt High

Risk-Adjusted Performance

Very Weak

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

Balanced Strategy

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Tax-exempt High and Balanced Strategy

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

The idea behind Tax Exempt High Yield and Balanced Strategy Fund 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.