Correlation Between ELECTRONIC ARTS and Microsoft

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

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

Diversification Opportunities for ELECTRONIC ARTS and Microsoft

0.67

Correlation Coefficient

ELECTRONIC ARTS  Microsoft

Poor diversification

The 3 months correlation between ELECTRONIC and Microsoft is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding ELECTRONIC ARTS and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and ELECTRONIC ARTS 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 ELECTRONIC ARTS 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 ELECTRONIC ARTS i.e., ELECTRONIC ARTS and Microsoft go up and down completely randomly.

Pair Corralation between ELECTRONIC ARTS and Microsoft

Assuming the 90 days trading horizon ELECTRONIC ARTS is expected to generate 3.15 times less return on investment than Microsoft. But when comparing it to its historical volatility, ELECTRONIC ARTS is 1.04 times less risky than Microsoft. It trades about 0.03 of its potential returns per unit of risk. Microsoft is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  20,566  in Microsoft on September 27, 2024 and sell it today you would earn a total of  21,134  from holding Microsoft or generate 102.76% return on investment over 90 days.

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

ELECTRONIC ARTS  vs.  Microsoft

ELECTRONIC ARTS

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ELECTRONIC ARTS are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, ELECTRONIC ARTS may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Microsoft

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with ELECTRONIC ARTS and Microsoft

The main advantage of trading using opposite ELECTRONIC ARTS and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ELECTRONIC ARTS 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 ELECTRONIC ARTS 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.