Correlation Between California Municipal and Large Cap
Can any of the company-specific risk be diversified away by investing in both California Municipal and Large Cap 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 California Municipal and Large Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between California Municipal Portfolio and Large Cap Value, you can compare the effects of market volatilities on California Municipal and Large Cap 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 California Municipal with a short position of Large Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of California Municipal and Large Cap.
Diversification Opportunities for California Municipal and Large Cap
0.86 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between California and Large is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding California Municipal Portfolio and Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Value and California 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 California Municipal Portfolio are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Value has no effect on the direction of California Municipal i.e., California Municipal and Large Cap go up and down completely randomly.
Pair Corralation between California Municipal and Large Cap
Assuming the 90 days horizon California Municipal is expected to generate 1.62 times less return on investment than Large Cap. But when comparing it to its historical volatility, California Municipal Portfolio is 7.53 times less risky than Large Cap. It trades about 0.38 of its potential returns per unit of risk. Large Cap Value is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 2,565 in Large Cap Value on June 7, 2025 and sell it today you would earn a total of 77.00 from holding Large Cap Value or generate 3.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
California Municipal Portfolio vs. Large Cap Value
Performance |
| Timeline |
| California Municipal |
| Large Cap Value |
California Municipal and Large Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with California Municipal and Large Cap
The main advantage of trading using opposite California Municipal and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if California Municipal position performs unexpectedly, Large Cap 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 Cap will offset losses from the drop in Large Cap's long position.The idea behind California Municipal Portfolio and Large Cap Value 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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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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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