Correlation Between Tax Exempt and Multifactor Equity

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

By analyzing existing cross correlation between Tax Exempt High Yield and Multifactor Equity Fund, you can compare the effects of market volatilities on Tax Exempt and Multifactor Equity 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 Multifactor Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tax Exempt and Multifactor Equity.

Diversification Opportunities for Tax Exempt and Multifactor Equity

-0.48

Correlation Coefficient

Tax Exempt  Multifactor Equity

Very good diversification

The 3 months correlation between Tax and Multifactor is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Tax Exempt High Yield and Multifactor Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Multifactor Equity 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 High Yield are associated (or correlated) with Multifactor Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Multifactor Equity has no effect on the direction of Tax Exempt i.e., Tax Exempt and Multifactor Equity go up and down completely randomly.

Pair Corralation between Tax Exempt and Multifactor Equity

Assuming the 90 days horizon Tax Exempt High Yield is expected to under-perform the Multifactor Equity. But the mutual fund apears to be less risky and, when comparing its historical volatility, Tax Exempt High Yield is 4.22 times less risky than Multifactor Equity. The mutual fund trades about -0.17 of its potential returns per unit of risk. The Multifactor Equity Fund is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  1,460  in Multifactor Equity Fund on May 1, 2025 and sell it today you would earn a total of  201.00  from holding Multifactor Equity Fund or generate 13.77% return on investment over 90 days.

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

Tax Exempt High Yield  vs.  Multifactor Equity Fund

Tax Exempt High

Risk-Adjusted Performance

Very Weak

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

Multifactor Equity

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Multifactor Equity Fund are ranked lower than 21 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Multifactor Equity showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tax Exempt and Multifactor Equity

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

The idea behind Tax Exempt High Yield and Multifactor Equity 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.

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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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.