Correlation Between Schwab Small and Northern Stock

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

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

Diversification Opportunities for Schwab Small and Northern Stock

0.9

Correlation Coefficient

Schwab Small  Northern Stock

Almost no diversification

The 3 months correlation between Schwab and Northern is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Index and Northern Stock Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Stock Index and Schwab Small 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 Index are associated (or correlated) with Northern Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Stock Index has no effect on the direction of Schwab Small i.e., Schwab Small and Northern Stock go up and down completely randomly.

Pair Corralation between Schwab Small and Northern Stock

Assuming the 90 days horizon Schwab Small Cap Index is expected to generate 1.9 times more return on investment than Northern Stock. However, Schwab Small is 1.9 times more volatile than Northern Stock Index. It trades about 0.15 of its potential returns per unit of risk. Northern Stock Index is currently generating about 0.2 per unit of risk. If you would invest  3,449  in Schwab Small Cap Index on September 12, 2024 and sell it today you would earn a total of  423.00  from holding Schwab Small Cap Index or generate 12.26% return on investment over 90 days.

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

Schwab Small Cap Index  vs.  Northern Stock Index

Schwab Small Cap

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Small Cap Index are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Schwab Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Northern Stock Index

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Stock Index are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Northern Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Schwab Small and Northern Stock

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

The idea behind Schwab Small Cap Index and Northern Stock Index 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.