Correlation Between Intermediate Term and Equity Income

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

By analyzing existing cross correlation between Intermediate Term Tax Free Bond and Equity Income Fund, you can compare the effects of market volatilities on Intermediate Term and Equity Income 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 Intermediate Term with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Intermediate Term and Equity Income.

Diversification Opportunities for Intermediate Term and Equity Income

0.55

Correlation Coefficient

Intermediate Term  Equity Income

Very weak diversification

The 3 months correlation between Intermediate and Equity is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Term Tax Free Bon and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Intermediate Term 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 Intermediate Term Tax Free Bond are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Intermediate Term i.e., Intermediate Term and Equity Income go up and down completely randomly.

Pair Corralation between Intermediate Term and Equity Income

Assuming the 90 days horizon Intermediate Term is expected to generate 2.27 times less return on investment than Equity Income. But when comparing it to its historical volatility, Intermediate Term Tax Free Bond is 4.02 times less risky than Equity Income. It trades about 0.31 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  854.00  in Equity Income Fund on June 16, 2025 and sell it today you would earn a total of  52.00  from holding Equity Income Fund or generate 6.09% return on investment over 90 days.

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

Intermediate Term Tax Free Bon  vs.  Equity Income Fund

Intermediate Term Tax

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Intermediate Term Tax Free Bond are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Intermediate Term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Income

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Equity Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Intermediate Term and Equity Income

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

The idea behind Intermediate Term Tax Free Bond and Equity Income 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.

Check out your portfolio center.

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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.