Correlation Between Vanguard Small and Schwab Fundamental

Can any of the company-specific risk be diversified away by investing in both Vanguard Small and Schwab Fundamental 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 Fundamental 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 Fundamental Small, you can compare the effects of market volatilities on Vanguard Small and Schwab Fundamental 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 Fundamental. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and Schwab Fundamental.

Diversification Opportunities for Vanguard Small and Schwab Fundamental

0.87

Correlation Coefficient

Vanguard Small  Schwab Fundamental

Very poor diversification

The 3 months correlation between Vanguard and Schwab is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Schwab Fundamental Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Fundamental Small 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 Fundamental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Fundamental Small has no effect on the direction of Vanguard Small i.e., Vanguard Small and Schwab Fundamental go up and down completely randomly.

Pair Corralation between Vanguard Small and Schwab Fundamental

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 0.99 times more return on investment than Schwab Fundamental. However, Vanguard Small Cap Index is 1.01 times less risky than Schwab Fundamental. It trades about 0.04 of its potential returns per unit of risk. Schwab Fundamental Small is currently generating about 0.03 per unit of risk. If you would invest  17,421  in Vanguard Small Cap Index on January 31, 2024 and sell it today you would earn a total of  4,374  from holding Vanguard Small Cap Index or generate 25.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.8%
Values	Daily Returns

Vanguard Small Cap Index  vs.  Schwab Fundamental Small

Vanguard Small Cap

Risk-Adjusted Performance

6 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental drivers, Vanguard Small is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Schwab Fundamental Small

Risk-Adjusted Performance

3 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Fundamental Small are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental indicators, Schwab Fundamental is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Small and Schwab Fundamental

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

The idea behind Vanguard Small Cap Index and Schwab Fundamental Small 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.