Correlation Between Tax-managed and New Economy

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

By analyzing existing cross correlation between Tax Managed Large Cap and New Economy Fund, you can compare the effects of market volatilities on Tax-managed and New Economy 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-managed with a short position of New Economy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax-managed and New Economy.

Diversification Opportunities for Tax-managed and New Economy

0.94

Correlation Coefficient

Tax-managed  New Economy

Almost no diversification

The 3 months correlation between Tax-managed and New is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Large Cap and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund and Tax-managed 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 Managed Large Cap are associated (or correlated) with New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of Tax-managed i.e., Tax-managed and New Economy go up and down completely randomly.

Pair Corralation between Tax-managed and New Economy

Assuming the 90 days horizon Tax-managed is expected to generate 1.06 times less return on investment than New Economy. But when comparing it to its historical volatility, Tax Managed Large Cap is 1.24 times less risky than New Economy. It trades about 0.18 of its potential returns per unit of risk. New Economy Fund is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  6,200  in New Economy Fund on September 4, 2024 and sell it today you would earn a total of  536.00  from holding New Economy Fund or generate 8.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Tax Managed Large Cap  vs.  New Economy Fund

Tax Managed Large

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Managed Large Cap are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Tax-managed may actually be approaching a critical reversion point that can send shares even higher in January 2025.

New Economy Fund

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in New Economy Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical indicators, New Economy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Tax-managed and New Economy

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

The idea behind Tax Managed Large Cap and New Economy 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.

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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.