Correlation Between Franklin Federal and Vanguard High-yield

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

By analyzing existing cross correlation between Franklin Federal Tax Free and Vanguard High Yield Tax Exempt, you can compare the effects of market volatilities on Franklin Federal and Vanguard High-yield 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 Franklin Federal with a short position of Vanguard High-yield. Check out your portfolio center. Please also check ongoing floating volatility patterns of Franklin Federal and Vanguard High-yield.

Diversification Opportunities for Franklin Federal and Vanguard High-yield

0.99

Correlation Coefficient

Franklin Federal  Vanguard High-yield

No risk reduction

The 3 months correlation between Franklin and Vanguard is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Franklin Federal Tax Free and Vanguard High Yield Tax Exempt in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard High Yield and Franklin Federal 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 Franklin Federal Tax Free are associated (or correlated) with Vanguard High-yield. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard High Yield has no effect on the direction of Franklin Federal i.e., Franklin Federal and Vanguard High-yield go up and down completely randomly.

Pair Corralation between Franklin Federal and Vanguard High-yield

Assuming the 90 days horizon Franklin Federal is expected to generate 1.18 times less return on investment than Vanguard High-yield. But when comparing it to its historical volatility, Franklin Federal Tax Free is 1.08 times less risky than Vanguard High-yield. It trades about 0.16 of its potential returns per unit of risk. Vanguard High Yield Tax Exempt is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,049  in Vanguard High Yield Tax Exempt on February 28, 2024 and sell it today you would earn a total of  7.00  from holding Vanguard High Yield Tax Exempt or generate 0.67% return on investment over 90 days.

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

Franklin Federal Tax Free  vs.  Vanguard High Yield Tax Exempt

Franklin Federal Tax

Risk-Adjusted Performance

0 of 100

Very Weak

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

Vanguard High Yield

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Franklin Federal and Vanguard High-yield

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

The idea behind Franklin Federal Tax Free and Vanguard High Yield 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.