Correlation Between Microsoft and Fortune Brands

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

By analyzing existing cross correlation between Microsoft and Fortune Brands Home, you can compare the effects of market volatilities on Microsoft and Fortune Brands 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 Fortune Brands. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Fortune Brands.

Diversification Opportunities for Microsoft and Fortune Brands

0.64

Correlation Coefficient

Microsoft  Fortune Brands

Poor diversification

The 3 months correlation between Microsoft and Fortune is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Fortune Brands Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fortune Brands Home 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 Fortune Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fortune Brands Home has no effect on the direction of Microsoft i.e., Microsoft and Fortune Brands go up and down completely randomly.

Pair Corralation between Microsoft and Fortune Brands

Assuming the 90 days trading horizon Microsoft is expected to under-perform the Fortune Brands. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.2 times less risky than Fortune Brands. The stock trades about -0.14 of its potential returns per unit of risk. The Fortune Brands Home is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  6,625  in Fortune Brands Home on December 23, 2024 and sell it today you would lose (875.00) from holding Fortune Brands Home or give up 13.21% of portfolio value over 90 days.

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

Microsoft  vs.  Fortune Brands Home

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 uncertain performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Fortune Brands Home

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fortune Brands Home has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's fundamental drivers remain somewhat strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Microsoft and Fortune Brands

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

The idea behind Microsoft and Fortune Brands Home 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.