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 Equity, 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

0.94

Correlation Coefficient

Schwab Total  Schwab Small

Almost no diversification

The 3 months correlation between Schwab and Schwab is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Total Stock and Schwab Small Cap Equity 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 is expected to generate 1.13 times less return on investment than Schwab Small. But when comparing it to its historical volatility, Schwab Total Stock is 1.76 times less risky than Schwab Small. It trades about 0.2 of its potential returns per unit of risk. Schwab Small Cap Equity is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  2,135  in Schwab Small Cap Equity on September 12, 2024 and sell it today you would earn a total of  217.00  from holding Schwab Small Cap Equity or generate 10.16% return on investment 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 Equity

Schwab Total Stock

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Total Stock are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Schwab Total may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Schwab Small Cap

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Small Cap Equity are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Schwab Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 Equity 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.