Correlation Between IShares SP and IShares SPTSX

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

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

Diversification Opportunities for IShares SP and IShares SPTSX

0.68

Correlation Coefficient

IShares SP  IShares SPTSX

Poor diversification

The 3 months correlation between IShares and IShares is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding iShares SP Small Cap and iShares SPTSX Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SPTSX Small and IShares SP 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 SP Small Cap are associated (or correlated) with IShares SPTSX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SPTSX Small has no effect on the direction of IShares SP i.e., IShares SP and IShares SPTSX go up and down completely randomly.

Pair Corralation between IShares SP and IShares SPTSX

Assuming the 90 days trading horizon iShares SP Small Cap is expected to generate 1.77 times more return on investment than IShares SPTSX. However, IShares SP is 1.77 times more volatile than iShares SPTSX Small. It trades about 0.19 of its potential returns per unit of risk. iShares SPTSX Small is currently generating about 0.15 per unit of risk. If you would invest  3,031  in iShares SP Small Cap on September 12, 2024 and sell it today you would earn a total of  500.00  from holding iShares SP Small Cap or generate 16.5% return on investment over 90 days.

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

iShares SP Small Cap  vs.  iShares SPTSX Small

iShares SP Small

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SP Small Cap are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares SP displayed solid returns over the last few months and may actually be approaching a breakup point.

iShares SPTSX Small

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with IShares SP and IShares SPTSX

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

The idea behind iShares SP Small Cap and iShares SPTSX Small 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.