Correlation Between Legg Mason and Schwab Small-cap

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

By analyzing existing cross correlation between Legg Mason Partners and Schwab Small Cap Equity, you can compare the effects of market volatilities on Legg Mason and Schwab Small-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 Legg Mason with a short position of Schwab Small-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Legg Mason and Schwab Small-cap.

Diversification Opportunities for Legg Mason and Schwab Small-cap

0.81

Correlation Coefficient

Legg Mason  Schwab Small-cap

Very poor diversification

The 3 months correlation between Legg and Schwab is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Legg Mason Partners and Schwab Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Small Cap and Legg Mason 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 Legg Mason Partners are associated (or correlated) with Schwab Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Small Cap has no effect on the direction of Legg Mason i.e., Legg Mason and Schwab Small-cap go up and down completely randomly.

Pair Corralation between Legg Mason and Schwab Small-cap

Assuming the 90 days trading horizon Legg Mason is expected to generate 2.49 times less return on investment than Schwab Small-cap. But when comparing it to its historical volatility, Legg Mason Partners is 3.21 times less risky than Schwab Small-cap. It trades about 0.19 of its potential returns per unit of risk. Schwab Small Cap Equity is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  2,116  in Schwab Small Cap Equity on September 11, 2024 and sell it today you would earn a total of  242.00  from holding Schwab Small Cap Equity or generate 11.44% return on investment over 90 days.

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

Legg Mason Partners  vs.  Schwab Small Cap Equity

Legg Mason Partners

Risk-Adjusted Performance

14 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Legg Mason Partners are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary indicators, Legg Mason is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Schwab Small Cap

Risk-Adjusted Performance

11 of 100

Good

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

Pair Trading with Legg Mason and Schwab Small-cap

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

The idea behind Legg Mason Partners and Schwab Small Cap Equity 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.