Correlation Between Microsoft and Johnson Johnson

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

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

Diversification Opportunities for Microsoft and Johnson Johnson

-0.66

Correlation Coefficient

Microsoft  Johnson Johnson

Excellent diversification

The 3 months correlation between Microsoft and Johnson is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Johnson Johnson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Johnson 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 Johnson Johnson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Johnson has no effect on the direction of Microsoft i.e., Microsoft and Johnson Johnson go up and down completely randomly.

Pair Corralation between Microsoft and Johnson Johnson

Assuming the 90 days trading horizon Microsoft is expected to generate 8.63 times less return on investment than Johnson Johnson. But when comparing it to its historical volatility, Microsoft is 1.17 times less risky than Johnson Johnson. It trades about 0.02 of its potential returns per unit of risk. Johnson Johnson is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  13,878  in Johnson Johnson on October 22, 2024 and sell it today you would earn a total of  492.00  from holding Johnson Johnson or generate 3.55% return on investment over 90 days.

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

Microsoft  vs.  Johnson Johnson

Microsoft

Risk-Adjusted Performance

6 of 100

OK

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 comparatively fragile technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Johnson Johnson

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Johnson Johnson has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound forward-looking indicators, Johnson Johnson is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Microsoft and Johnson Johnson

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

The idea behind Microsoft and Johnson Johnson 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.