Correlation Between Schwab Small and Schwab 1000

Can any of the company-specific risk be diversified away by investing in both Schwab Small and Schwab 1000 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 1000 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Schwab Small Cap Equity and Schwab 1000 Index, you can compare the effects of market volatilities on Schwab Small and Schwab 1000 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 1000. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab Small and Schwab 1000.

Diversification Opportunities for Schwab Small and Schwab 1000

0.51

Correlation Coefficient

Schwab Small  Schwab 1000

Very weak diversification

The 3 months correlation between Schwab and Schwab is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap Equity and Schwab 1000 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab 1000 Index 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 Equity are associated (or correlated) with Schwab 1000. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab 1000 Index has no effect on the direction of Schwab Small i.e., Schwab Small and Schwab 1000 go up and down completely randomly.

Pair Corralation between Schwab Small and Schwab 1000

Assuming the 90 days horizon Schwab Small is expected to generate 2.93 times less return on investment than Schwab 1000. In addition to that, Schwab Small is 1.88 times more volatile than Schwab 1000 Index. It trades about 0.02 of its total potential returns per unit of risk. Schwab 1000 Index is currently generating about 0.13 per unit of volatility. If you would invest  9,780  in Schwab 1000 Index on September 28, 2024 and sell it today you would earn a total of  3,140  from holding Schwab 1000 Index or generate 32.11% return on investment over 90 days.

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

Schwab Small Cap Equity  vs.  Schwab 1000 Index

Schwab Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schwab Small Cap Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Schwab 1000 Index

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab 1000 Index are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Schwab 1000 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 1000

The main advantage of trading using opposite Schwab Small and Schwab 1000 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Schwab Small position performs unexpectedly, Schwab 1000 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 1000 will offset losses from the drop in Schwab 1000's long position.

The idea behind Schwab Small Cap Equity and Schwab 1000 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.

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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.