Correlation Between Extra Space and Microsoft

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

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

Diversification Opportunities for Extra Space and Microsoft

0.3

Correlation Coefficient

Extra Space  Microsoft

Weak diversification

The 3 months correlation between Extra and Microsoft is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Extra Space Storage and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Extra Space 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 Extra Space Storage are associated (or correlated) with Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of Extra Space i.e., Extra Space and Microsoft go up and down completely randomly.

Pair Corralation between Extra Space and Microsoft

Assuming the 90 days trading horizon Extra Space Storage is expected to generate 2.22 times more return on investment than Microsoft. However, Extra Space is 2.22 times more volatile than Microsoft. It trades about -0.16 of its potential returns per unit of risk. Microsoft is currently generating about -0.37 per unit of risk. If you would invest  24,448  in Extra Space Storage on October 15, 2024 and sell it today you would lose (2,145) from holding Extra Space Storage or give up 8.77% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Extra Space Storage  vs.  Microsoft

Extra Space Storage

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extra Space Storage has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Extra Space is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Microsoft

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Extra Space and Microsoft

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

The idea behind Extra Space Storage and Microsoft 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.