Correlation Between Dimensional and Total Stock

By analyzing existing cross correlation between Dimensional US Core and Total Stock Market, you can compare the effects of market volatilities on Dimensional and Total Stock 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 Dimensional with a short position of Total Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dimensional and Total Stock.

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

Diversification Opportunities for Dimensional and Total Stock

0.99
  Correlation Coefficient
Dimensional US Core
Total Stock Market

No risk reduction

The 3 months correlation between Dimensional and Total is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Dimensional US Core and Total Stock Market in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Total Stock Market and Dimensional 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 Dimensional US Core are associated (or correlated) with Total Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Total Stock Market has no effect on the direction of Dimensional i.e., Dimensional and Total Stock go up and down completely randomly.

Pair Corralation between Dimensional and Total Stock

Given the investment horizon of 90 days Dimensional is expected to generate 1.26 times less return on investment than Total Stock. In addition to that, Dimensional is 1.12 times more volatile than Total Stock Market. It trades about 0.05 of its total potential returns per unit of risk. Total Stock Market is currently generating about 0.06 per unit of volatility. If you would invest  21,821  in Total Stock Market on September 5, 2021 and sell it today you would earn a total of  1,298  from holding Total Stock Market or generate 5.95% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy96.09%
ValuesDaily Returns

Dimensional US Core  vs.  Total Stock Market

 Performance (%) 
      Timeline 
Dimensional US Core 
Dimensional Performance
1 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Dimensional US Core are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Dimensional is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Dimensional Price Channel

Total Stock Market 
Total Performance
0 of 100
Over the last 90 days Total Stock Market has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Total Stock is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Total Price Channel

Dimensional and Total Stock Volatility Contrast

 Predicted Return Density 
      Returns 

Pair Trading with Dimensional and Total Stock

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

Dimensional US Core

Pair trading matchups for Dimensional

The idea behind Dimensional US Core and Total Stock Market 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.

Total Stock Market

Pair trading matchups for Total Stock

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.

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