Correlation Between Morningstar Municipal and Aama Equity

Can any of the company-specific risk be diversified away by investing in both Morningstar Municipal and Aama Equity 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 Morningstar Municipal and Aama Equity into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Morningstar Municipal Bond and Aama Equity Fund, you can compare the effects of market volatilities on Morningstar Municipal and Aama Equity 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 Morningstar Municipal with a short position of Aama Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Municipal and Aama Equity.

Diversification Opportunities for Morningstar Municipal and Aama Equity

-0.04

Correlation Coefficient

Morningstar Municipal  Aama Equity

Good diversification

The 3 months correlation between Morningstar and Aama is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Municipal Bond and Aama Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aama Equity Fund and Morningstar Municipal 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 Morningstar Municipal Bond are associated (or correlated) with Aama Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aama Equity Fund has no effect on the direction of Morningstar Municipal i.e., Morningstar Municipal and Aama Equity go up and down completely randomly.

Pair Corralation between Morningstar Municipal and Aama Equity

Assuming the 90 days horizon Morningstar Municipal is expected to generate 8.96 times less return on investment than Aama Equity. But when comparing it to its historical volatility, Morningstar Municipal Bond is 3.06 times less risky than Aama Equity. It trades about 0.07 of its potential returns per unit of risk. Aama Equity Fund is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  1,880  in Aama Equity Fund on September 2, 2024 and sell it today you would earn a total of  157.00  from holding Aama Equity Fund or generate 8.35% return on investment over 90 days.

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

Morningstar Municipal Bond  vs.  Aama Equity Fund

Morningstar Municipal

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Municipal Bond are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Morningstar Municipal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Aama Equity Fund

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Aama Equity Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Aama Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Morningstar Municipal and Aama Equity

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

The idea behind Morningstar Municipal Bond and Aama Equity 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.