Correlation Between Schwab Total and Schwab Fundamental

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

Diversification Opportunities for Schwab Total and Schwab Fundamental

0.88

Correlation Coefficient

Schwab Total  Schwab Fundamental

Very poor diversification

The 3 months correlation between Schwab and Schwab is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Total Stock 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 Total 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 Total Stock 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 Total i.e., Schwab Total and Schwab Fundamental go up and down completely randomly.

Pair Corralation between Schwab Total and Schwab Fundamental

Assuming the 90 days horizon Schwab Total Stock is expected to under-perform the Schwab Fundamental. In addition to that, Schwab Total is 1.29 times more volatile than Schwab Fundamental Large. It trades about -0.09 of its total potential returns per unit of risk. Schwab Fundamental Large is currently generating about -0.01 per unit of volatility. If you would invest  2,783  in Schwab Fundamental Large on December 29, 2024 and sell it today you would lose (17.00) from holding Schwab Fundamental Large or give up 0.61% of portfolio value over 90 days.

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

Schwab Total Stock  vs.  Schwab Fundamental Large

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.

Schwab Fundamental Large

Risk-Adjusted Performance

Weak

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

The main advantage of trading using opposite Schwab Total and Schwab Fundamental positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Schwab Total 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 Total Stock 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.

Check out your portfolio center.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.