Correlation Between Schwab Small and Schwab Total

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

Diversification Opportunities for Schwab Small and Schwab Total

0.95

Correlation Coefficient

Schwab Small  Schwab Total

Almost no diversification

The 3 months correlation between Schwab and Schwab is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Index and Schwab Total Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Total Stock 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 Schwab Total. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Total Stock has no effect on the direction of Schwab Small i.e., Schwab Small and Schwab Total go up and down completely randomly.

Pair Corralation between Schwab Small and Schwab Total

Assuming the 90 days horizon Schwab Small Cap Index is expected to under-perform the Schwab Total. In addition to that, Schwab Small is 1.16 times more volatile than Schwab Total Stock. It trades about -0.12 of its total potential returns per unit of risk. Schwab Total Stock is currently generating about -0.09 per unit of volatility. If you would invest  9,948  in Schwab Total Stock on December 29, 2024 and sell it today you would lose (564.00) from holding Schwab Total Stock or give up 5.67% of portfolio value 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 Total Stock

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 Total Stock

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab Total Stock has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Schwab 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 and Schwab Total

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

The idea behind Schwab Small Cap Index and Schwab Total Stock 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.