Correlation Between Microsoft and CVS Health

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

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

Diversification Opportunities for Microsoft and CVS Health

-0.62

Correlation Coefficient

Microsoft  CVS Health

Excellent diversification

The 3 months correlation between Microsoft and CVS is -0.62. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and CVS Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health 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 CVS Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS Health has no effect on the direction of Microsoft i.e., Microsoft and CVS Health go up and down completely randomly.

Pair Corralation between Microsoft and CVS Health

Assuming the 90 days trading horizon Microsoft is expected to generate 0.47 times more return on investment than CVS Health. However, Microsoft is 2.14 times less risky than CVS Health. It trades about 0.21 of its potential returns per unit of risk. CVS Health is currently generating about -0.56 per unit of risk. If you would invest  39,660  in Microsoft on September 26, 2024 and sell it today you would earn a total of  2,040  from holding Microsoft or generate 5.14% return on investment over 90 days.

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

Microsoft  vs.  CVS Health

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. In spite of rather uncertain technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

CVS Health

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CVS Health 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 basic indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Microsoft and CVS Health

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

The idea behind Microsoft and CVS Health 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.

Check out your portfolio center.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.