Correlation Between Schwab Large and ARCA Institutional

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

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

Diversification Opportunities for Schwab Large and ARCA Institutional

0.99

Correlation Coefficient

Schwab Large  ARCA Institutional

No risk reduction

The 3 months correlation between Schwab and ARCA is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Large Cap Growth and ARCA Institutional in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Institutional and Schwab Large 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 Large Cap Growth are associated (or correlated) with ARCA Institutional. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARCA Institutional has no effect on the direction of Schwab Large i.e., Schwab Large and ARCA Institutional go up and down completely randomly.

Pair Corralation between Schwab Large and ARCA Institutional

Given the investment horizon of 90 days Schwab Large is expected to generate 1.05 times less return on investment than ARCA Institutional. In addition to that, Schwab Large is 1.19 times more volatile than ARCA Institutional. It trades about 0.17 of its total potential returns per unit of risk. ARCA Institutional is currently generating about 0.21 per unit of volatility. If you would invest  300,683  in ARCA Institutional on September 26, 2024 and sell it today you would earn a total of  12,571  from holding ARCA Institutional or generate 4.18% return on investment over 90 days.

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

Schwab Large Cap Growth  vs.  ARCA Institutional

Pair Trading with Schwab Large and ARCA Institutional

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

The idea behind Schwab Large Cap Growth and ARCA Institutional 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.