Correlation Between Tax Exempt and American Funds

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

By analyzing existing cross correlation between Tax Exempt Bond and American Funds Retirement, you can compare the effects of market volatilities on Tax Exempt and American Funds 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 Exempt with a short position of American Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and American Funds.

Diversification Opportunities for Tax Exempt and American Funds

0.69

Correlation Coefficient

Tax Exempt  American Funds

Poor diversification

The 3 months correlation between Tax and American is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt Bond and American Funds Retirement in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Funds Retirement and Tax Exempt 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 Exempt Bond are associated (or correlated) with American Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Funds Retirement has no effect on the direction of Tax Exempt i.e., Tax Exempt and American Funds go up and down completely randomly.

Pair Corralation between Tax Exempt and American Funds

Assuming the 90 days horizon Tax Exempt Bond is expected to generate 0.83 times more return on investment than American Funds. However, Tax Exempt Bond is 1.2 times less risky than American Funds. It trades about -0.09 of its potential returns per unit of risk. American Funds Retirement is currently generating about -0.11 per unit of risk. If you would invest  1,255  in Tax Exempt Bond on September 27, 2024 and sell it today you would lose (19.00) from holding Tax Exempt Bond or give up 1.51% of portfolio value over 90 days.

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

Tax Exempt Bond  vs.  American Funds Retirement

Tax Exempt Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tax Exempt Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Tax Exempt is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

American Funds Retirement

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Funds Retirement has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, American Funds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Tax Exempt and American Funds

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

The idea behind Tax Exempt Bond and American Funds Retirement 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 Anywhere module to track or share privately all of your investments from the convenience of any device.