Correlation Between Microsoft and Koninklijke Philips

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

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

Diversification Opportunities for Microsoft and Koninklijke Philips

0.25

Correlation Coefficient

Microsoft  Koninklijke Philips

Modest diversification

The 3 months correlation between Microsoft and Koninklijke is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Koninklijke Philips NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Koninklijke Philips 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 Koninklijke Philips. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Koninklijke Philips has no effect on the direction of Microsoft i.e., Microsoft and Koninklijke Philips go up and down completely randomly.

Pair Corralation between Microsoft and Koninklijke Philips

Assuming the 90 days trading horizon Microsoft is expected to under-perform the Koninklijke Philips. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.1 times less risky than Koninklijke Philips. The stock trades about -0.11 of its potential returns per unit of risk. The Koninklijke Philips NV is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  2,380  in Koninklijke Philips NV on December 26, 2024 and sell it today you would lose (80.00) from holding Koninklijke Philips NV or give up 3.36% of portfolio value over 90 days.

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

Microsoft  vs.  Koninklijke Philips NV

Microsoft

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's technical and fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Koninklijke Philips

Risk-Adjusted Performance

Very Weak

Over the last 90 days Koninklijke Philips NV has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Koninklijke Philips is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Microsoft and Koninklijke Philips

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

The idea behind Microsoft and Koninklijke Philips NV 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.