Correlation Between Microsoft and KENNAMETAL INC

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

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

Diversification Opportunities for Microsoft and KENNAMETAL INC

0.52

Correlation Coefficient

Microsoft  KENNAMETAL INC

Very weak diversification

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

Pair Corralation between Microsoft and KENNAMETAL INC

Assuming the 90 days trading horizon Microsoft is expected to generate 0.56 times more return on investment than KENNAMETAL INC. However, Microsoft is 1.8 times less risky than KENNAMETAL INC. It trades about 0.09 of its potential returns per unit of risk. KENNAMETAL INC is currently generating about 0.04 per unit of risk. If you would invest  38,868  in Microsoft on September 22, 2024 and sell it today you would earn a total of  3,282  from holding Microsoft or generate 8.44% return on investment over 90 days.

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

Microsoft  vs.  KENNAMETAL INC

Microsoft

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

KENNAMETAL INC

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in KENNAMETAL INC are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, KENNAMETAL INC may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and KENNAMETAL INC

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

The idea behind Microsoft and KENNAMETAL 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.