Correlation Between Schwab Small and Schwab Large

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

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

Diversification Opportunities for Schwab Small and Schwab Large

0.95

Correlation Coefficient

Schwab Small  Schwab Large

Almost no diversification

The 3 months correlation between Schwab and Schwab is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap ETF and Schwab Large Cap ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Large Cap and Schwab Small 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 Schwab Small Cap ETF are associated (or correlated) with Schwab Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Large Cap has no effect on the direction of Schwab Small i.e., Schwab Small and Schwab Large go up and down completely randomly.

Pair Corralation between Schwab Small and Schwab Large

Given the investment horizon of 90 days Schwab Small Cap ETF is expected to under-perform the Schwab Large. In addition to that, Schwab Small is 1.16 times more volatile than Schwab Large Cap ETF. It trades about -0.12 of its total potential returns per unit of risk. Schwab Large Cap ETF is currently generating about -0.08 per unit of volatility. If you would invest  2,320  in Schwab Large Cap ETF on December 28, 2024 and sell it today you would lose (126.00) from holding Schwab Large Cap ETF or give up 5.43% of portfolio value over 90 days.

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

Schwab Small Cap ETF  vs.  Schwab Large Cap ETF

Schwab Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab Small Cap ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Etf's technical indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.

Schwab Large Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab Large Cap ETF has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical indicators, Schwab Large is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Schwab Small and Schwab Large

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

The idea behind Schwab Small Cap ETF and Schwab Large Cap ETF 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.