Correlation Between Schwab Small-cap and Schwab Core

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

Diversification Opportunities for Schwab Small-cap and Schwab Core

0.54

Correlation Coefficient

Schwab Small-cap  Schwab Core

Very weak diversification

The 3 months correlation between Schwab and Schwab is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Equity and Schwab E Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab E 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 Schwab Core. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab E Equity has no effect on the direction of Schwab Small-cap i.e., Schwab Small-cap and Schwab Core go up and down completely randomly.

Pair Corralation between Schwab Small-cap and Schwab Core

Assuming the 90 days horizon Schwab Small Cap Equity is expected to under-perform the Schwab Core. In addition to that, Schwab Small-cap is 1.33 times more volatile than Schwab E Equity. It trades about -0.29 of its total potential returns per unit of risk. Schwab E Equity is currently generating about -0.2 per unit of volatility. If you would invest  2,375  in Schwab E Equity on December 3, 2024 and sell it today you would lose (85.00) from holding Schwab E Equity or give up 3.58% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.24%
Values	Daily Returns

Schwab Small Cap Equity  vs.  Schwab E 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 weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Schwab E Equity

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Schwab Small-cap and Schwab Core

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

The idea behind Schwab Small Cap Equity and Schwab E 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.

Check out your portfolio center.

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.