Correlation Between Schwab Small-cap and Royce Total

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

Diversification Opportunities for Schwab Small-cap and Royce Total

0.64

Correlation Coefficient

Schwab Small-cap  Royce Total

Poor diversification

The 3 months correlation between Schwab and Royce is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Index and Royce Total Return in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Total Return 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 Index are associated (or correlated) with Royce Total. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Total Return has no effect on the direction of Schwab Small-cap i.e., Schwab Small-cap and Royce Total go up and down completely randomly.

Pair Corralation between Schwab Small-cap and Royce Total

Assuming the 90 days horizon Schwab Small Cap Index is expected to under-perform the Royce Total. In addition to that, Schwab Small-cap is 1.15 times more volatile than Royce Total Return. It trades about -0.09 of its total potential returns per unit of risk. Royce Total Return is currently generating about -0.06 per unit of volatility. If you would invest  738.00  in Royce Total Return on December 20, 2024 and sell it today you would lose (29.00) from holding Royce Total Return or give up 3.93% of portfolio value over 90 days.

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

Schwab Small Cap Index  vs.  Royce Total Return

Schwab Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab Small Cap Index 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.

Royce Total Return

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Total Return has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Royce Total 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 Royce Total

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

The idea behind Schwab Small Cap Index and Royce Total Return 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 Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .