Correlation Between Municipal Bond and Large Capitalization

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

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

Diversification Opportunities for Municipal Bond and Large Capitalization

0.63

Correlation Coefficient

Municipal Bond  Large Capitalization

Poor diversification

The 3 months correlation between Municipal and Large is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Municipal Bond Portfolio and Large Capitalization Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capitalization and Municipal Bond 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 Municipal Bond Portfolio are associated (or correlated) with Large Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capitalization has no effect on the direction of Municipal Bond i.e., Municipal Bond and Large Capitalization go up and down completely randomly.

Pair Corralation between Municipal Bond and Large Capitalization

Assuming the 90 days horizon Municipal Bond is expected to generate 32.65 times less return on investment than Large Capitalization. But when comparing it to its historical volatility, Municipal Bond Portfolio is 8.81 times less risky than Large Capitalization. It trades about 0.08 of its potential returns per unit of risk. Large Capitalization Growth is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  497.00  in Large Capitalization Growth on May 3, 2025 and sell it today you would earn a total of  82.00  from holding Large Capitalization Growth or generate 16.5% return on investment over 90 days.

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

Municipal Bond Portfolio  vs.  Large Capitalization Growth

Municipal Bond Portfolio

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Municipal Bond Portfolio are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Municipal Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Large Capitalization

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Large Capitalization Growth are ranked lower than 22 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Large Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Municipal Bond and Large Capitalization

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

The idea behind Municipal Bond Portfolio and Large Capitalization Growth 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.