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

0.84

Correlation Coefficient

Microsoft  ServiceNow

Very poor diversification

The 3 months correlation between Microsoft and ServiceNow is 0.84. 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 2.66 times less return on investment than ServiceNow. But when comparing it to its historical volatility, Microsoft is 1.33 times less risky than ServiceNow. It trades about 0.14 of its potential returns per unit of risk. ServiceNow is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  80,120  in ServiceNow on September 14, 2024 and sell it today you would earn a total of  29,540  from holding ServiceNow or generate 36.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.46%
Values	Daily Returns

Microsoft  vs.  ServiceNow

Microsoft

Risk-Adjusted Performance

10 of 100

OK

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

ServiceNow

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in ServiceNow are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, ServiceNow reported solid returns over the last few months and may actually be approaching a breakup point.

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.

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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.