Correlation Between Vanguard Small and Schwab Short

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

By analyzing existing cross correlation between Vanguard Small Cap Index and Schwab Short Term Treasury, you can compare the effects of market volatilities on Vanguard Small and Schwab Short 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 Vanguard Small with a short position of Schwab Short. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and Schwab Short.

Diversification Opportunities for Vanguard Small and Schwab Short

-0.39

Correlation Coefficient

Vanguard Small  Schwab Short

Very good diversification

The 3 months correlation between Vanguard and Schwab is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Schwab Short Term Treasury in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Short Term and Vanguard 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 Vanguard Small Cap Index are associated (or correlated) with Schwab Short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Short Term has no effect on the direction of Vanguard Small i.e., Vanguard Small and Schwab Short go up and down completely randomly.

Pair Corralation between Vanguard Small and Schwab Short

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 14.05 times more return on investment than Schwab Short. However, Vanguard Small is 14.05 times more volatile than Schwab Short Term Treasury. It trades about 0.33 of its potential returns per unit of risk. Schwab Short Term Treasury is currently generating about 0.04 per unit of risk. If you would invest  23,914  in Vanguard Small Cap Index on August 28, 2024 and sell it today you would earn a total of  2,244  from holding Vanguard Small Cap Index or generate 9.38% return on investment over 90 days.

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

Vanguard Small Cap Index  vs.  Schwab Short Term Treasury

Vanguard Small Cap

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating fundamental drivers, Vanguard Small sustained solid returns over the last few months and may actually be approaching a breakup point.

Schwab Short Term

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Short Term Treasury are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical indicators, Schwab Short is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Small and Schwab Short

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

The idea behind Vanguard Small Cap Index and Schwab Short Term Treasury 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.