Correlation Between Microsoft and Adobe

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

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

Diversification Opportunities for Microsoft and Adobe

0.35

Correlation Coefficient

Microsoft  Adobe

Weak diversification

The 3 months correlation between Microsoft and Adobe is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Adobe Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Adobe Inc 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 Adobe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Adobe Inc has no effect on the direction of Microsoft i.e., Microsoft and Adobe go up and down completely randomly.

Pair Corralation between Microsoft and Adobe

Assuming the 90 days horizon Microsoft is expected to generate 0.37 times more return on investment than Adobe. However, Microsoft is 2.67 times less risky than Adobe. It trades about 0.25 of its potential returns per unit of risk. Adobe Inc is currently generating about -0.15 per unit of risk. If you would invest  39,470  in Microsoft on September 22, 2024 and sell it today you would earn a total of  2,640  from holding Microsoft or generate 6.69% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.65%
Values	Daily Returns

Microsoft  vs.  Adobe Inc

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. Despite nearly fragile basic indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Adobe Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Adobe Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Microsoft and Adobe

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

The idea behind Microsoft and Adobe Inc 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.