Correlation Between Schwab Broad and Schwab Small

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

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

Diversification Opportunities for Schwab Broad and Schwab Small

0.96

Correlation Coefficient

Schwab Broad  Schwab Small

Almost no diversification

The 3 months correlation between Schwab and Schwab is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Broad Market and Schwab Small Cap ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Small Cap and Schwab Broad 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 Broad Market are associated (or correlated) with Schwab Small. 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 Schwab Broad i.e., Schwab Broad and Schwab Small go up and down completely randomly.

Pair Corralation between Schwab Broad and Schwab Small

Given the investment horizon of 90 days Schwab Broad is expected to generate 1.11 times less return on investment than Schwab Small. But when comparing it to its historical volatility, Schwab Broad Market is 1.63 times less risky than Schwab Small. It trades about 0.21 of its potential returns per unit of risk. Schwab Small Cap ETF is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,510  in Schwab Small Cap ETF on September 13, 2024 and sell it today you would earn a total of  250.00  from holding Schwab Small Cap ETF or generate 9.96% return on investment over 90 days.

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

Schwab Broad Market  vs.  Schwab Small Cap ETF

Schwab Broad Market

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Broad Market are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat fragile technical indicators, Schwab Broad may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 ETF are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical indicators, Schwab Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Schwab Broad and Schwab Small

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

The idea behind Schwab Broad Market and Schwab Small 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.