Correlation Between Schwab Core and Schwab California

Can any of the company-specific risk be diversified away by investing in both Schwab Core and Schwab California 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 Core and Schwab California into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Schwab E Equity and Schwab California Tax Free, you can compare the effects of market volatilities on Schwab Core and Schwab California 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 Core with a short position of Schwab California. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab Core and Schwab California.

Diversification Opportunities for Schwab Core and Schwab California

-0.27

Correlation Coefficient

Schwab Core  Schwab California

Very good diversification

The 3 months correlation between Schwab and Schwab is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding Schwab E Equity and Schwab California Tax Free in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab California Tax and Schwab Core 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 E Equity are associated (or correlated) with Schwab California. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab California Tax has no effect on the direction of Schwab Core i.e., Schwab Core and Schwab California go up and down completely randomly.

Pair Corralation between Schwab Core and Schwab California

Assuming the 90 days horizon Schwab E Equity is expected to generate 3.79 times more return on investment than Schwab California. However, Schwab Core is 3.79 times more volatile than Schwab California Tax Free. It trades about 0.18 of its potential returns per unit of risk. Schwab California Tax Free is currently generating about 0.07 per unit of risk. If you would invest  2,351  in Schwab E Equity on September 4, 2024 and sell it today you would earn a total of  205.00  from holding Schwab E Equity or generate 8.72% return on investment over 90 days.

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

Schwab E Equity  vs.  Schwab California Tax Free

Schwab E Equity

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab E Equity are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Schwab Core may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Schwab California Tax

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab California Tax Free are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Schwab California 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 Core and Schwab California

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

The idea behind Schwab E Equity and Schwab California Tax Free 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.