Correlation Between Diversified Municipal and Vanguard Short

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

By analyzing existing cross correlation between Diversified Municipal Portfolio and Vanguard Short Term Tax Exempt, you can compare the effects of market volatilities on Diversified Municipal and Vanguard Short 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 Diversified Municipal with a short position of Vanguard Short. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diversified Municipal and Vanguard Short.

Diversification Opportunities for Diversified Municipal and Vanguard Short

0.46

Correlation Coefficient

Diversified Municipal  Vanguard Short

Very weak diversification

The 3 months correlation between Diversified and Vanguard is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Municipal Portfoli and Vanguard Short Term Tax Exempt in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Short Term and Diversified 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 Diversified Municipal Portfolio are associated (or correlated) with Vanguard Short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Short Term has no effect on the direction of Diversified Municipal i.e., Diversified Municipal and Vanguard Short go up and down completely randomly.

Pair Corralation between Diversified Municipal and Vanguard Short

Assuming the 90 days horizon Diversified Municipal Portfolio is expected to under-perform the Vanguard Short. In addition to that, Diversified Municipal is 3.47 times more volatile than Vanguard Short Term Tax Exempt. It trades about -0.11 of its total potential returns per unit of risk. Vanguard Short Term Tax Exempt is currently generating about -0.24 per unit of volatility. If you would invest  1,571  in Vanguard Short Term Tax Exempt on February 2, 2024 and sell it today you would lose (3.00) from holding Vanguard Short Term Tax Exempt or give up 0.19% of portfolio value over 90 days.

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

Diversified Municipal Portfoli  vs.  Vanguard Short Term Tax Exempt

Diversified Municipal

Risk-Adjusted Performance

0 of 100

Very Weak

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

Vanguard Short Term

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Diversified Municipal and Vanguard Short

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

The idea behind Diversified Municipal Portfolio and Vanguard Short Term Tax Exempt 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.