Correlation Between Morningstar Municipal and Morningstar Equity

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

Diversification Opportunities for Morningstar Municipal and Morningstar Equity

0.16

Correlation Coefficient

Morningstar Municipal  Morningstar Equity

Average diversification

The 3 months correlation between Morningstar and Morningstar is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Municipal Bond and Morningstar Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morningstar Equity 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 Morningstar Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morningstar Equity has no effect on the direction of Morningstar Municipal i.e., Morningstar Municipal and Morningstar Equity go up and down completely randomly.

Pair Corralation between Morningstar Municipal and Morningstar Equity

Assuming the 90 days horizon Morningstar Municipal is expected to generate 13.88 times less return on investment than Morningstar Equity. But when comparing it to its historical volatility, Morningstar Municipal Bond is 3.22 times less risky than Morningstar Equity. It trades about 0.04 of its potential returns per unit of risk. Morningstar Equity is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,370  in Morningstar Equity on September 12, 2024 and sell it today you would earn a total of  99.00  from holding Morningstar Equity or generate 7.23% return on investment over 90 days.

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

Morningstar Municipal Bond  vs.  Morningstar Equity

Morningstar Municipal

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Municipal Bond are ranked lower than 3 (%) 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.

Morningstar Equity

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Equity are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Morningstar Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Morningstar Municipal and Morningstar Equity

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

The idea behind Morningstar Municipal Bond and Morningstar Equity 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.