Correlation Between Microsoft and NORTHEAST UTILITIES

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

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

Diversification Opportunities for Microsoft and NORTHEAST UTILITIES

-0.52

Correlation Coefficient

Microsoft  NORTHEAST UTILITIES

Excellent diversification

The 3 months correlation between Microsoft and NORTHEAST is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and NORTHEAST UTILITIES in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NORTHEAST UTILITIES 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 NORTHEAST UTILITIES. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NORTHEAST UTILITIES has no effect on the direction of Microsoft i.e., Microsoft and NORTHEAST UTILITIES go up and down completely randomly.

Pair Corralation between Microsoft and NORTHEAST UTILITIES

Assuming the 90 days trading horizon Microsoft is expected to generate 0.98 times more return on investment than NORTHEAST UTILITIES. However, Microsoft is 1.02 times less risky than NORTHEAST UTILITIES. It trades about 0.11 of its potential returns per unit of risk. NORTHEAST UTILITIES is currently generating about -0.03 per unit of risk. If you would invest  20,742  in Microsoft on September 27, 2024 and sell it today you would earn a total of  21,088  from holding Microsoft or generate 101.67% return on investment over 90 days.

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

Microsoft  vs.  NORTHEAST UTILITIES

Microsoft

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 8 (%) 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.

NORTHEAST UTILITIES

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NORTHEAST UTILITIES has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's forward-looking indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Microsoft and NORTHEAST UTILITIES

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

The idea behind Microsoft and NORTHEAST UTILITIES 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.