Correlation Between Schwab Fundamental and FlexShares Morningstar

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

By analyzing existing cross correlation between Schwab Fundamental International and FlexShares Morningstar Developed, you can compare the effects of market volatilities on Schwab Fundamental and FlexShares Morningstar 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 Fundamental with a short position of FlexShares Morningstar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Schwab Fundamental and FlexShares Morningstar.

Diversification Opportunities for Schwab Fundamental and FlexShares Morningstar

0.95

Correlation Coefficient

Schwab Fundamental  FlexShares Morningstar

Almost no diversification

The 3 months correlation between Schwab and FlexShares is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Fundamental Internation and FlexShares Morningstar Develop in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FlexShares Morningstar and Schwab Fundamental 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 Fundamental International are associated (or correlated) with FlexShares Morningstar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FlexShares Morningstar has no effect on the direction of Schwab Fundamental i.e., Schwab Fundamental and FlexShares Morningstar go up and down completely randomly.

Pair Corralation between Schwab Fundamental and FlexShares Morningstar

Given the investment horizon of 90 days Schwab Fundamental International is expected to generate 1.04 times more return on investment than FlexShares Morningstar. However, Schwab Fundamental is 1.04 times more volatile than FlexShares Morningstar Developed. It trades about -0.04 of its potential returns per unit of risk. FlexShares Morningstar Developed is currently generating about -0.12 per unit of risk. If you would invest  3,532  in Schwab Fundamental International on February 2, 2024 and sell it today you would lose (25.50) from holding Schwab Fundamental International or give up 0.72% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.65%
Values	Daily Returns

Schwab Fundamental Internation  vs.  FlexShares Morningstar Develop

Schwab Fundamental

Risk-Adjusted Performance

9 of 100

OK

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

FlexShares Morningstar

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in FlexShares Morningstar Developed are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, FlexShares Morningstar is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Schwab Fundamental and FlexShares Morningstar

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

The idea behind Schwab Fundamental International and FlexShares Morningstar Developed 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.