Correlation Between Small Cap and Baird Municipal

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

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

Diversification Opportunities for Small Cap and Baird Municipal

-0.1

Correlation Coefficient

Small Cap  Baird Municipal

Good diversification

The 3 months correlation between Small and Baird is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Baird Municipal Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Baird Municipal Bond and Small Cap 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 Small Cap Stock are associated (or correlated) with Baird Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Baird Municipal Bond has no effect on the direction of Small Cap i.e., Small Cap and Baird Municipal go up and down completely randomly.

Pair Corralation between Small Cap and Baird Municipal

Assuming the 90 days horizon Small Cap Stock is expected to generate 5.79 times more return on investment than Baird Municipal. However, Small Cap is 5.79 times more volatile than Baird Municipal Bond. It trades about 0.13 of its potential returns per unit of risk. Baird Municipal Bond is currently generating about 0.06 per unit of risk. If you would invest  1,387  in Small Cap Stock on September 2, 2024 and sell it today you would earn a total of  142.00  from holding Small Cap Stock or generate 10.24% return on investment over 90 days.

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

Small Cap Stock  vs.  Baird Municipal Bond

Small Cap Stock

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Baird Municipal Bond

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Baird Municipal Bond are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Baird Municipal is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Baird Municipal

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

The idea behind Small Cap Stock and Baird Municipal Bond 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.