Correlation Between Microsoft and Nippon Steel

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

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

Diversification Opportunities for Microsoft and Nippon Steel

-0.24

Correlation Coefficient

Microsoft  Nippon Steel

Very good diversification

The 3 months correlation between Microsoft and Nippon is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Nippon Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nippon Steel 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 Nippon Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nippon Steel has no effect on the direction of Microsoft i.e., Microsoft and Nippon Steel go up and down completely randomly.

Pair Corralation between Microsoft and Nippon Steel

Assuming the 90 days trading horizon Microsoft is expected to generate 0.86 times more return on investment than Nippon Steel. However, Microsoft is 1.16 times less risky than Nippon Steel. It trades about 0.45 of its potential returns per unit of risk. Nippon Steel is currently generating about -0.12 per unit of risk. If you would invest  38,972  in Microsoft on September 20, 2024 and sell it today you would earn a total of  4,108  from holding Microsoft or generate 10.54% return on investment over 90 days.

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

Microsoft  vs.  Nippon Steel

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.

Nippon Steel

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nippon Steel has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Microsoft and Nippon Steel

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

The idea behind Microsoft and Nippon Steel 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.