Correlation Between Schwab Balanced and Extended Market

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

By analyzing existing cross correlation between Schwab Balanced Fund and Extended Market Index, you can compare the effects of market volatilities on Schwab Balanced and Extended Market 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 Balanced with a short position of Extended Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab Balanced and Extended Market.

Diversification Opportunities for Schwab Balanced and Extended Market

0.61

Correlation Coefficient

Schwab Balanced  Extended Market

Poor diversification

The 3 months correlation between Schwab and Extended is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Balanced Fund and Extended Market Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extended Market Index and Schwab Balanced 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 Balanced Fund are associated (or correlated) with Extended Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extended Market Index has no effect on the direction of Schwab Balanced i.e., Schwab Balanced and Extended Market go up and down completely randomly.

Pair Corralation between Schwab Balanced and Extended Market

Assuming the 90 days horizon Schwab Balanced Fund is expected to generate 0.59 times more return on investment than Extended Market. However, Schwab Balanced Fund is 1.7 times less risky than Extended Market. It trades about 0.08 of its potential returns per unit of risk. Extended Market Index is currently generating about -0.01 per unit of risk. If you would invest  1,615  in Schwab Balanced Fund on March 14, 2024 and sell it today you would earn a total of  45.00  from holding Schwab Balanced Fund or generate 2.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.41%
Values	Daily Returns

Schwab Balanced Fund  vs.  Extended Market Index

Schwab Balanced

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Balanced Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Schwab Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Extended Market Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extended Market Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Extended Market is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Schwab Balanced and Extended Market

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

The idea behind Schwab Balanced Fund and Extended Market Index 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..