Correlation Between IShares Small and IShares MSCI

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

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

Diversification Opportunities for IShares Small and IShares MSCI

0.21

Correlation Coefficient

IShares Small  IShares MSCI

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 Small Cap and iShares MSCI EAFE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI EAFE and IShares 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 iShares Small Cap are associated (or correlated) with IShares MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI EAFE has no effect on the direction of IShares Small i.e., IShares Small and IShares MSCI go up and down completely randomly.

Pair Corralation between IShares Small and IShares MSCI

Assuming the 90 days trading horizon iShares Small Cap is expected to generate 2.07 times more return on investment than IShares MSCI. However, IShares Small is 2.07 times more volatile than iShares MSCI EAFE. It trades about 0.15 of its potential returns per unit of risk. iShares MSCI EAFE is currently generating about 0.07 per unit of risk. If you would invest  4,103  in iShares Small Cap on September 12, 2024 and sell it today you would earn a total of  491.00  from holding iShares Small Cap or generate 11.97% return on investment over 90 days.

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

iShares Small Cap  vs.  iShares MSCI EAFE

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.

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.

Pair Trading with IShares Small and IShares MSCI

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

The idea behind iShares Small Cap and iShares MSCI EAFE 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.