Correlation Between Microsoft and Fannie Mae

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

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

Diversification Opportunities for Microsoft and Fannie Mae

-0.08

Correlation Coefficient

Microsoft  Fannie Mae

Good diversification

The 3 months correlation between Microsoft and Fannie is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Fannie Mae in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fannie Mae and Microsoft 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 Microsoft are associated (or correlated) with Fannie Mae. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fannie Mae has no effect on the direction of Microsoft i.e., Microsoft and Fannie Mae go up and down completely randomly.

Pair Corralation between Microsoft and Fannie Mae

Assuming the 90 days trading horizon Microsoft is expected to under-perform the Fannie Mae. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 4.67 times less risky than Fannie Mae. The stock trades about -0.08 of its potential returns per unit of risk. The Fannie Mae is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  259.00  in Fannie Mae on December 24, 2024 and sell it today you would earn a total of  356.00  from holding Fannie Mae or generate 137.45% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.08%
Values	Daily Returns

Microsoft  vs.  Fannie Mae

Microsoft

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Fannie Mae

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Fannie Mae are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Fannie Mae unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Fannie Mae

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

The idea behind Microsoft and Fannie Mae 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 Anywhere module to track or share privately all of your investments from the convenience of any device.