Correlation Between California Tax-free and Vanguard California

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

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

Diversification Opportunities for California Tax-free and Vanguard California

0.96

Correlation Coefficient

California Tax-free  Vanguard California

Almost no diversification

The 3 months correlation between California and Vanguard is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding California Tax Free Income and Vanguard California Long Term in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard California and California Tax-free 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 California Tax Free Income are associated (or correlated) with Vanguard California. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard California has no effect on the direction of California Tax-free i.e., California Tax-free and Vanguard California go up and down completely randomly.

Pair Corralation between California Tax-free and Vanguard California

Assuming the 90 days horizon California Tax-free is expected to generate 2.04 times less return on investment than Vanguard California. But when comparing it to its historical volatility, California Tax Free Income is 1.47 times less risky than Vanguard California. It trades about 0.04 of its potential returns per unit of risk. Vanguard California Long Term is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,149  in Vanguard California Long Term on August 31, 2024 and sell it today you would earn a total of  11.00  from holding Vanguard California Long Term or generate 0.96% return on investment over 90 days.

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

California Tax Free Income  vs.  Vanguard California Long Term

California Tax Free

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in California Tax Free Income are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. 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.

Vanguard California

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard California Long Term are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Vanguard California is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with California Tax-free and Vanguard California

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

The idea behind California Tax Free Income and Vanguard California Long Term 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.