Correlation Between Tax Exempt and The National

Can any of the company-specific risk be diversified away by investing in both Tax Exempt and The National 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 The National 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 The National Tax Free, you can compare the effects of market volatilities on Tax Exempt and The National 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 The National. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and The National.

Diversification Opportunities for Tax Exempt and The National

0.97

Correlation Coefficient

Tax Exempt  The National

Almost no diversification

The 3 months correlation between Tax and The is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and The National Tax Free in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Tax 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 The National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Tax has no effect on the direction of Tax Exempt i.e., Tax Exempt and The National go up and down completely randomly.

Pair Corralation between Tax Exempt and The National

Assuming the 90 days horizon Tax Exempt Bond is expected to generate 1.14 times more return on investment than The National. However, Tax Exempt is 1.14 times more volatile than The National Tax Free. It trades about 0.05 of its potential returns per unit of risk. The National Tax Free is currently generating about 0.03 per unit of risk. If you would invest  1,246  in Tax Exempt Bond on August 31, 2024 and sell it today you would earn a total of  9.00  from holding Tax Exempt Bond or generate 0.72% return on investment over 90 days.

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

Tax Exempt Bond  vs.  The National Tax Free

Tax Exempt Bond

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Exempt Bond are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. 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.

National Tax

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The National Tax Free are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong essential indicators, The National 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 and The National

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

The idea behind Tax Exempt Bond and The National Tax Free 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.