Correlation Between Schwab Small-cap and Schwab Fundamental

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

Diversification Opportunities for Schwab Small-cap and Schwab Fundamental

0.96

Correlation Coefficient

Schwab Small-cap  Schwab Fundamental

Almost no diversification

The 3 months correlation between Schwab and Schwab is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Index and Schwab Fundamental Large in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Fundamental Large 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 Schwab Fundamental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Fundamental Large has no effect on the direction of Schwab Small-cap i.e., Schwab Small-cap and Schwab Fundamental go up and down completely randomly.

Pair Corralation between Schwab Small-cap and Schwab Fundamental

Assuming the 90 days horizon Schwab Small Cap Index is expected to generate 1.86 times more return on investment than Schwab Fundamental. However, Schwab Small-cap is 1.86 times more volatile than Schwab Fundamental Large. It trades about 0.17 of its potential returns per unit of risk. Schwab Fundamental Large is currently generating about 0.19 per unit of risk. If you would invest  3,452  in Schwab Small Cap Index on September 5, 2024 and sell it today you would earn a total of  473.00  from holding Schwab Small Cap Index or generate 13.7% 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.  Schwab Fundamental Large

Schwab Small Cap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Small Cap Index are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Schwab Small-cap showed solid returns over the last few months and may actually be approaching a breakup point.

Schwab Fundamental Large

Risk-Adjusted Performance

15 of 100

Good

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

Pair Trading with Schwab Small-cap and Schwab Fundamental

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

The idea behind Schwab Small Cap Index and Schwab Fundamental Large 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.