Correlation Between Morningstar Municipal and Morningstar Alternatives

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

Diversification Opportunities for Morningstar Municipal and Morningstar Alternatives

0.22

Correlation Coefficient

Morningstar Municipal  Morningstar Alternatives

Modest diversification

The 3 months correlation between Morningstar and Morningstar is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Municipal Bond and Morningstar Alternatives in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morningstar Alternatives 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 Alternatives. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morningstar Alternatives has no effect on the direction of Morningstar Municipal i.e., Morningstar Municipal and Morningstar Alternatives go up and down completely randomly.

Pair Corralation between Morningstar Municipal and Morningstar Alternatives

Assuming the 90 days horizon Morningstar Municipal Bond is expected to generate 1.99 times more return on investment than Morningstar Alternatives. However, Morningstar Municipal is 1.99 times more volatile than Morningstar Alternatives. It trades about 0.21 of its potential returns per unit of risk. Morningstar Alternatives is currently generating about 0.2 per unit of risk. If you would invest  999.00  in Morningstar Municipal Bond on September 5, 2024 and sell it today you would earn a total of  11.00  from holding Morningstar Municipal Bond or generate 1.1% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Morningstar Municipal Bond  vs.  Morningstar Alternatives

Morningstar Municipal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Municipal Bond are ranked lower than 6 (%) 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 Alternatives

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Alternatives are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Morningstar Alternatives is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Morningstar Municipal and Morningstar Alternatives

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

The idea behind Morningstar Municipal Bond and Morningstar Alternatives 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.

Check out your portfolio center.

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.