Correlation Between Schwab Small and Schwab International

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

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

Diversification Opportunities for Schwab Small and Schwab International

0.81

Correlation Coefficient

Schwab Small  Schwab International

Very poor diversification

The 3 months correlation between Schwab and Schwab is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Small Cap ETF and Schwab International Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab International 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 ETF are associated (or correlated) with Schwab International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab International has no effect on the direction of Schwab Small i.e., Schwab Small and Schwab International go up and down completely randomly.

Pair Corralation between Schwab Small and Schwab International

Given the investment horizon of 90 days Schwab Small Cap ETF is expected to under-perform the Schwab International. In addition to that, Schwab Small is 1.34 times more volatile than Schwab International Equity. It trades about -0.04 of its total potential returns per unit of risk. Schwab International Equity is currently generating about -0.02 per unit of volatility. If you would invest  3,866  in Schwab International Equity on February 5, 2024 and sell it today you would lose (14.00) from holding Schwab International Equity or give up 0.36% of portfolio value over 90 days.

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

Schwab Small Cap ETF  vs.  Schwab International Equity

Schwab Small Cap

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Small Cap ETF are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong technical indicators, Schwab Small is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Schwab International

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab International Equity are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical indicators, Schwab International is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Schwab Small and Schwab International

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

The idea behind Schwab Small Cap ETF and Schwab International 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.

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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.