Correlation Between Schwab Total and Schwab Small

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

Diversification Opportunities for Schwab Total and Schwab Small

0.95

Correlation Coefficient

Schwab Total  Schwab Small

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 Total Stock and Schwab Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Small Cap 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 Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Small Cap has no effect on the direction of Schwab Total i.e., Schwab Total and Schwab Small go up and down completely randomly.

Pair Corralation between Schwab Total and Schwab Small

Assuming the 90 days horizon Schwab Total Stock is expected to generate 0.86 times more return on investment than Schwab Small. However, Schwab Total Stock is 1.16 times less risky than Schwab Small. It trades about -0.09 of its potential returns per unit of risk. Schwab Small Cap Index is currently generating about -0.12 per unit of risk. 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 Total Stock  vs.  Schwab Small Cap Index

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 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.

Pair Trading with Schwab Total and Schwab Small

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

The idea behind Schwab Total Stock and Schwab Small Cap 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.