Correlation Between Schwab Small-cap and Sarofim Equity

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

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

Diversification Opportunities for Schwab Small-cap and Sarofim Equity

0.81

Correlation Coefficient

Schwab Small-cap  Sarofim Equity

Very poor diversification

The 3 months correlation between Schwab and Sarofim is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Equity and Sarofim Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sarofim Equity and Schwab Small-cap 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 Small Cap Equity are associated (or correlated) with Sarofim Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sarofim Equity has no effect on the direction of Schwab Small-cap i.e., Schwab Small-cap and Sarofim Equity go up and down completely randomly.

Pair Corralation between Schwab Small-cap and Sarofim Equity

Assuming the 90 days horizon Schwab Small Cap Equity is expected to under-perform the Sarofim Equity. In addition to that, Schwab Small-cap is 1.34 times more volatile than Sarofim Equity. It trades about -0.08 of its total potential returns per unit of risk. Sarofim Equity is currently generating about -0.05 per unit of volatility. If you would invest  1,430  in Sarofim Equity on December 27, 2024 and sell it today you would lose (41.00) from holding Sarofim Equity or give up 2.87% of portfolio value over 90 days.

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

Schwab Small Cap Equity  vs.  Sarofim Equity

Schwab Small Cap

Risk-Adjusted Performance

Very Weak

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

Sarofim Equity

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sarofim Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong primary indicators, Sarofim Equity 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 Small-cap and Sarofim Equity

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

The idea behind Schwab Small Cap Equity and Sarofim Equity 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.