Correlation Between Schwab Health and Large Cap

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

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

Diversification Opportunities for Schwab Health and Large Cap

-0.51

Correlation Coefficient

Schwab Health  Large Cap

Excellent diversification

The 3 months correlation between Schwab and Large is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Health Care and Large Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Fund and Schwab Health 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 Health Care are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Fund has no effect on the direction of Schwab Health i.e., Schwab Health and Large Cap go up and down completely randomly.

Pair Corralation between Schwab Health and Large Cap

Assuming the 90 days horizon Schwab Health Care is expected to under-perform the Large Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Schwab Health Care is 1.03 times less risky than Large Cap. The mutual fund trades about -0.21 of its potential returns per unit of risk. The Large Cap Fund is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,670  in Large Cap Fund on September 3, 2024 and sell it today you would earn a total of  101.00  from holding Large Cap Fund or generate 6.05% return on investment over 90 days.

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

Schwab Health Care  vs.  Large Cap Fund

Schwab Health Care

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schwab Health Care has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Large Cap Fund

Risk-Adjusted Performance

10 of 100

OK

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

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

The idea behind Schwab Health Care and Large Cap Fund 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.