Correlation Between Microsoft and ServiceNow

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

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

Diversification Opportunities for Microsoft and ServiceNow

0.81

Correlation Coefficient

Microsoft  ServiceNow

Very poor diversification

The 3 months correlation between Microsoft and ServiceNow is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and ServiceNow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ServiceNow 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 ServiceNow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ServiceNow has no effect on the direction of Microsoft i.e., Microsoft and ServiceNow go up and down completely randomly.

Pair Corralation between Microsoft and ServiceNow

Assuming the 90 days trading horizon Microsoft is expected to generate 0.77 times more return on investment than ServiceNow. However, Microsoft is 1.31 times less risky than ServiceNow. It trades about -0.09 of its potential returns per unit of risk. ServiceNow is currently generating about -0.15 per unit of risk. If you would invest  41,387  in Microsoft on December 4, 2024 and sell it today you would lose (3,862) from holding Microsoft or give up 9.33% of portfolio value over 90 days.

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

Microsoft  vs.  ServiceNow

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 fragile performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

ServiceNow

Risk-Adjusted Performance

Very Weak

Over the last 90 days ServiceNow has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Microsoft and ServiceNow

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

The idea behind Microsoft and ServiceNow 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 Transaction History module to view history of all your transactions and understand their impact on performance.