Correlation Between Microchip Technology and Naked Wines

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

By analyzing existing cross correlation between Microchip Technology and Naked Wines plc, you can compare the effects of market volatilities on Microchip Technology and Naked Wines 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 Microchip Technology with a short position of Naked Wines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microchip Technology and Naked Wines.

Diversification Opportunities for Microchip Technology and Naked Wines

0.26

Correlation Coefficient

Microchip Technology  Naked Wines

Modest diversification

The 3 months correlation between Microchip and Naked is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Microchip Technology and Naked Wines plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Naked Wines plc and Microchip Technology 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 Microchip Technology are associated (or correlated) with Naked Wines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Naked Wines plc has no effect on the direction of Microchip Technology i.e., Microchip Technology and Naked Wines go up and down completely randomly.

Pair Corralation between Microchip Technology and Naked Wines

Assuming the 90 days trading horizon Microchip Technology is expected to generate 262.41 times less return on investment than Naked Wines. But when comparing it to its historical volatility, Microchip Technology is 1.45 times less risky than Naked Wines. It trades about 0.0 of its potential returns per unit of risk. Naked Wines plc is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  5,210  in Naked Wines plc on December 4, 2024 and sell it today you would earn a total of  1,370  from holding Naked Wines plc or generate 26.3% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

Microchip Technology  vs.  Naked Wines plc

Microchip Technology

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microchip Technology has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Microchip Technology is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Naked Wines plc

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Naked Wines plc are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Naked Wines unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microchip Technology and Naked Wines

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

The idea behind Microchip Technology and Naked Wines plc 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.