Correlation Between Schwab California and Schwab Health

Can any of the company-specific risk be diversified away by investing in both Schwab California and Schwab Health 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 Health 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 Health Care, you can compare the effects of market volatilities on Schwab California and Schwab Health 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 Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab California and Schwab Health.

Diversification Opportunities for Schwab California and Schwab Health

0.61

Correlation Coefficient

Schwab California  Schwab Health

Poor diversification

The 3 months correlation between Schwab and Schwab is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Schwab California Tax Free and Schwab Health Care in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Health Care 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 Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Health Care has no effect on the direction of Schwab California i.e., Schwab California and Schwab Health go up and down completely randomly.

Pair Corralation between Schwab California and Schwab Health

Assuming the 90 days horizon Schwab California Tax Free is expected to under-perform the Schwab Health. But the mutual fund apears to be less risky and, when comparing its historical volatility, Schwab California Tax Free is 4.01 times less risky than Schwab Health. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Schwab Health Care is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  2,321  in Schwab Health Care on December 29, 2024 and sell it today you would earn a total of  154.00  from holding Schwab Health Care or generate 6.64% 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 Health Care

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 Health Care

Risk-Adjusted Performance

Good

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

Pair Trading with Schwab California and Schwab Health

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

The idea behind Schwab California Tax Free and Schwab Health Care 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.