Correlation Between IShares MSCI and IShares Small

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

By analyzing existing cross correlation between iShares MSCI EAFE and iShares Small Cap, you can compare the effects of market volatilities on IShares MSCI and IShares 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 IShares MSCI with a short position of IShares Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and IShares Small.

Diversification Opportunities for IShares MSCI and IShares Small

0.21

Correlation Coefficient

IShares MSCI  IShares Small

Modest diversification

The 3 months correlation between IShares and IShares is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI EAFE and iShares Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Small Cap and IShares MSCI 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 iShares MSCI EAFE are associated (or correlated) with IShares Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Small Cap has no effect on the direction of IShares MSCI i.e., IShares MSCI and IShares Small go up and down completely randomly.

Pair Corralation between IShares MSCI and IShares Small

Assuming the 90 days trading horizon IShares MSCI is expected to generate 1.39 times less return on investment than IShares Small. But when comparing it to its historical volatility, iShares MSCI EAFE is 1.97 times less risky than IShares Small. It trades about 0.09 of its potential returns per unit of risk. iShares Small Cap is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  3,583  in iShares Small Cap on September 12, 2024 and sell it today you would earn a total of  1,011  from holding iShares Small Cap or generate 28.22% return on investment over 90 days.

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

iShares MSCI EAFE  vs.  iShares Small Cap

iShares MSCI EAFE

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI EAFE are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IShares MSCI is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

iShares Small Cap

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Small Cap are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares MSCI and IShares Small

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

The idea behind iShares MSCI EAFE and iShares Small Cap 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.