Correlation Between Schwab California and Schwab Small

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

Diversification Opportunities for Schwab California and Schwab Small

0.02

Correlation Coefficient

Schwab California  Schwab Small

Significant diversification

The 3 months correlation between Schwab and Schwab is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Schwab California Tax Free 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 California 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 California Tax Free 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 California i.e., Schwab California and Schwab Small go up and down completely randomly.

Pair Corralation between Schwab California and Schwab Small

Assuming the 90 days horizon Schwab California is expected to generate 33.0 times less return on investment than Schwab Small. But when comparing it to its historical volatility, Schwab California Tax Free is 6.54 times less risky than Schwab Small. It trades about 0.03 of its potential returns per unit of risk. Schwab Small Cap Index is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  3,449  in Schwab Small Cap Index on September 12, 2024 and sell it today you would earn a total of  423.00  from holding Schwab Small Cap Index or generate 12.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Schwab California Tax Free  vs.  Schwab Small Cap Index

Schwab California Tax

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab California Tax Free are ranked lower than 2 (%) 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 latest stock price disturbance, may contribute to short-term losses for the investors.

Schwab Small Cap

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Small Cap Index are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Schwab Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Schwab California and Schwab Small

The main advantage of trading using opposite Schwab California and Schwab Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Schwab California 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 California Tax Free 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.