Correlation Between Schwab Target and State Farm

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

By analyzing existing cross correlation between Schwab Target 2015 and State Farm Growth, you can compare the effects of market volatilities on Schwab Target and State Farm 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 Target with a short position of State Farm. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab Target and State Farm.

Diversification Opportunities for Schwab Target and State Farm

0.85

Correlation Coefficient

Schwab Target  State Farm

Very poor diversification

The 3 months correlation between Schwab and State is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Target 2015 and State Farm Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on State Farm Growth and Schwab Target 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 Target 2015 are associated (or correlated) with State Farm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of State Farm Growth has no effect on the direction of Schwab Target i.e., Schwab Target and State Farm go up and down completely randomly.

Pair Corralation between Schwab Target and State Farm

Assuming the 90 days horizon Schwab Target 2015 is expected to generate 0.56 times more return on investment than State Farm. However, Schwab Target 2015 is 1.78 times less risky than State Farm. It trades about -0.05 of its potential returns per unit of risk. State Farm Growth is currently generating about -0.03 per unit of risk. If you would invest  1,222  in Schwab Target 2015 on January 28, 2024 and sell it today you would lose (11.00) from holding Schwab Target 2015 or give up 0.9% of portfolio value over 90 days.

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

Schwab Target 2015  vs.  State Farm Growth

Schwab Target 2015

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schwab Target 2015 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Schwab Target is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

State Farm Growth

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in State Farm Growth are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, State Farm 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 Target and State Farm

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

The idea behind Schwab Target 2015 and State Farm Growth 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.