Correlation Between Schwab California and Schwab Aggregate

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

By analyzing existing cross correlation between Schwab California Tax Free and Schwab Aggregate Bond, you can compare the effects of market volatilities on Schwab California and Schwab Aggregate 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 California with a short position of Schwab Aggregate. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab California and Schwab Aggregate.

Diversification Opportunities for Schwab California and Schwab Aggregate

0.6

Correlation Coefficient

Schwab California  Schwab Aggregate

Poor diversification

The 3 months correlation between Schwab and Schwab is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Schwab California Tax Free and Schwab Aggregate Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Aggregate Bond and Schwab California 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 California Tax Free are associated (or correlated) with Schwab Aggregate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Aggregate Bond has no effect on the direction of Schwab California i.e., Schwab California and Schwab Aggregate go up and down completely randomly.

Pair Corralation between Schwab California and Schwab Aggregate

Assuming the 90 days horizon Schwab California Tax Free is expected to under-perform the Schwab Aggregate. But the mutual fund apears to be less risky and, when comparing its historical volatility, Schwab California Tax Free is 1.65 times less risky than Schwab Aggregate. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Schwab Aggregate Bond is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  870.00  in Schwab Aggregate Bond on December 29, 2024 and sell it today you would earn a total of  21.00  from holding Schwab Aggregate Bond or generate 2.41% return on investment over 90 days.

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

Schwab California Tax Free  vs.  Schwab Aggregate Bond

Schwab California Tax

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab California Tax Free has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Schwab California is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Schwab Aggregate Bond

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Aggregate Bond are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Schwab Aggregate 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 California and Schwab Aggregate

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

The idea behind Schwab California Tax Free and Schwab Aggregate Bond 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.