Correlation Between IShares Edge and Alpha Architect

Can any of the company-specific risk be diversified away by investing in both IShares Edge and Alpha Architect 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 IShares Edge and Alpha Architect into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between iShares Edge MSCI and Alpha Architect International, you can compare the effects of market volatilities on IShares Edge and Alpha Architect 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 IShares Edge with a short position of Alpha Architect. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Edge and Alpha Architect.

Diversification Opportunities for IShares Edge and Alpha Architect

0.98

Correlation Coefficient

IShares Edge  Alpha Architect

Almost no diversification

The 3 months correlation between IShares and Alpha is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding iShares Edge MSCI and Alpha Architect International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alpha Architect Inte and IShares Edge 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 iShares Edge MSCI are associated (or correlated) with Alpha Architect. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alpha Architect Inte has no effect on the direction of IShares Edge i.e., IShares Edge and Alpha Architect go up and down completely randomly.

Pair Corralation between IShares Edge and Alpha Architect

Given the investment horizon of 90 days iShares Edge MSCI is expected to generate 1.12 times more return on investment than Alpha Architect. However, IShares Edge is 1.12 times more volatile than Alpha Architect International. It trades about 0.21 of its potential returns per unit of risk. Alpha Architect International is currently generating about 0.14 per unit of risk. If you would invest  2,711  in iShares Edge MSCI on December 28, 2024 and sell it today you would earn a total of  345.00  from holding iShares Edge MSCI or generate 12.73% return on investment over 90 days.

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

iShares Edge MSCI  vs.  Alpha Architect International

iShares Edge MSCI

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Edge MSCI are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating essential indicators, IShares Edge unveiled solid returns over the last few months and may actually be approaching a breakup point.

Alpha Architect Inte

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alpha Architect International are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain basic indicators, Alpha Architect may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with IShares Edge and Alpha Architect

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

The idea behind iShares Edge MSCI and Alpha Architect International 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.