Correlation Between Madison Diversified and Schwab Small-cap
Can any of the company-specific risk be diversified away by investing in both Madison Diversified and Schwab Small-cap 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 Madison Diversified and Schwab Small-cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Madison Diversified Income and Schwab Small Cap Index, you can compare the effects of market volatilities on Madison Diversified and Schwab Small-cap 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 Madison Diversified with a short position of Schwab Small-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Madison Diversified and Schwab Small-cap.
Diversification Opportunities for Madison Diversified and Schwab Small-cap
0.87 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Madison and Schwab is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Madison Diversified Income and Schwab Small Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Small Cap and Madison Diversified 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 Madison Diversified Income are associated (or correlated) with Schwab Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Small Cap has no effect on the direction of Madison Diversified i.e., Madison Diversified and Schwab Small-cap go up and down completely randomly.
Pair Corralation between Madison Diversified and Schwab Small-cap
Assuming the 90 days horizon Madison Diversified is expected to generate 4.2 times less return on investment than Schwab Small-cap. But when comparing it to its historical volatility, Madison Diversified Income is 4.16 times less risky than Schwab Small-cap. It trades about 0.07 of its potential returns per unit of risk. Schwab Small Cap Index is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 3,426 in Schwab Small Cap Index on November 2, 2024 and sell it today you would earn a total of 271.00 from holding Schwab Small Cap Index or generate 7.91% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Madison Diversified Income vs. Schwab Small Cap Index
Performance |
| Timeline |
| Madison Diversified |
| Schwab Small Cap |
Madison Diversified and Schwab Small-cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Madison Diversified and Schwab Small-cap
The main advantage of trading using opposite Madison Diversified and Schwab Small-cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Madison Diversified position performs unexpectedly, Schwab Small-cap 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 Small-cap will offset losses from the drop in Schwab Small-cap's long position.The idea behind Madison Diversified Income and Schwab Small Cap Index 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.
| Schwab Small-cap vs. Schwab International Index | Schwab Small-cap vs. Schwab Total Stock | Schwab Small-cap vs. Schwab Sp 500 | Schwab Small-cap vs. Schwab 1000 Index |
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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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