Correlation Between Microsoft and TFS FINANCIAL

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

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

Diversification Opportunities for Microsoft and TFS FINANCIAL

0.62

Correlation Coefficient

Microsoft  TFS FINANCIAL

Poor diversification

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

Pair Corralation between Microsoft and TFS FINANCIAL

Assuming the 90 days trading horizon Microsoft is expected to generate 0.7 times more return on investment than TFS FINANCIAL. However, Microsoft is 1.42 times less risky than TFS FINANCIAL. It trades about 0.11 of its potential returns per unit of risk. TFS FINANCIAL is currently generating about 0.08 per unit of risk. If you would invest  38,219  in Microsoft on September 28, 2024 and sell it today you would earn a total of  3,611  from holding Microsoft or generate 9.45% return on investment over 90 days.

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

Microsoft  vs.  TFS FINANCIAL

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

TFS FINANCIAL

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in TFS FINANCIAL are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, TFS FINANCIAL may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and TFS FINANCIAL

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

The idea behind Microsoft and TFS FINANCIAL 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.