Correlation Between Schwab Small-cap and Schwab International

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

Diversification Opportunities for Schwab Small-cap and Schwab International

0.22

Correlation Coefficient

Schwab Small-cap  Schwab International

Modest diversification

The 3 months correlation between Schwab and Schwab is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Index and Schwab International Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab International 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 International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab International has no effect on the direction of Schwab Small-cap i.e., Schwab Small-cap and Schwab International go up and down completely randomly.

Pair Corralation between Schwab Small-cap and Schwab International

Assuming the 90 days horizon Schwab Small Cap Index is expected to under-perform the Schwab International. In addition to that, Schwab Small-cap is 1.46 times more volatile than Schwab International Index. It trades about -0.16 of its total potential returns per unit of risk. Schwab International Index is currently generating about 0.1 per unit of volatility. If you would invest  2,338  in Schwab International Index on December 2, 2024 and sell it today you would earn a total of  107.00  from holding Schwab International Index or generate 4.58% return on investment over 90 days.

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

Schwab Small Cap Index  vs.  Schwab International Index

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.

Schwab International

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab International Index are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Schwab International 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 Schwab International

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

The idea behind Schwab Small Cap Index and Schwab International 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.