Correlation Between Microsoft and Electronic Arts

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

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

Diversification Opportunities for Microsoft and Electronic Arts

0.69

Correlation Coefficient

Microsoft  Electronic Arts

Poor diversification

The 3 months correlation between Microsoft and Electronic is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Electronic Arts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Electronic Arts 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 Electronic Arts. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Electronic Arts has no effect on the direction of Microsoft i.e., Microsoft and Electronic Arts go up and down completely randomly.

Pair Corralation between Microsoft and Electronic Arts

Assuming the 90 days trading horizon Microsoft is expected to generate 1.07 times more return on investment than Electronic Arts. However, Microsoft is 1.07 times more volatile than Electronic Arts. It trades about 0.1 of its potential returns per unit of risk. Electronic Arts is currently generating about 0.05 per unit of risk. If you would invest  22,029  in Microsoft on September 20, 2024 and sell it today you would earn a total of  21,051  from holding Microsoft or generate 95.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	90.69%
Values	Daily Returns

Microsoft  vs.  Electronic Arts

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

Electronic Arts

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Electronic Arts are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Electronic Arts unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Electronic Arts

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

The idea behind Microsoft and Electronic Arts 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.