Correlation Between Large Cap and Schwab Health

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

By analyzing existing cross correlation between Large Cap Fund and Schwab Health Care, you can compare the effects of market volatilities on Large Cap and Schwab Health 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 Large Cap with a short position of Schwab Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Schwab Health.

Diversification Opportunities for Large Cap and Schwab Health

0.19

Correlation Coefficient

Large Cap  Schwab Health

Average diversification

The 3 months correlation between Large and Schwab is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Fund and Schwab Health Care in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Health Care and Large Cap 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 Large Cap Fund are associated (or correlated) with Schwab Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Health Care has no effect on the direction of Large Cap i.e., Large Cap and Schwab Health go up and down completely randomly.

Pair Corralation between Large Cap and Schwab Health

Assuming the 90 days horizon Large Cap is expected to generate 3.35 times less return on investment than Schwab Health. In addition to that, Large Cap is 1.09 times more volatile than Schwab Health Care. It trades about 0.04 of its total potential returns per unit of risk. Schwab Health Care is currently generating about 0.15 per unit of volatility. If you would invest  2,321  in Schwab Health Care on December 29, 2024 and sell it today you would earn a total of  154.00  from holding Schwab Health Care or generate 6.64% return on investment over 90 days.

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

Large Cap Fund  vs.  Schwab Health Care

Large Cap Fund

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Fund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Schwab Health Care

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Health Care are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Schwab Health may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Large Cap and Schwab Health

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

The idea behind Large Cap Fund and Schwab Health Care 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.