Correlation Between Microsoft and Cheniere Energy

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

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

Diversification Opportunities for Microsoft and Cheniere Energy

0.72

Correlation Coefficient

Microsoft  Cheniere Energy

Poor diversification

The 3 months correlation between Microsoft and Cheniere is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Cheniere Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cheniere Energy 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 Cheniere Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cheniere Energy has no effect on the direction of Microsoft i.e., Microsoft and Cheniere Energy go up and down completely randomly.

Pair Corralation between Microsoft and Cheniere Energy

Assuming the 90 days trading horizon Microsoft is expected to generate 0.92 times more return on investment than Cheniere Energy. However, Microsoft is 1.08 times less risky than Cheniere Energy. It trades about 0.01 of its potential returns per unit of risk. Cheniere Energy is currently generating about -0.23 per unit of risk. If you would invest  41,040  in Microsoft on October 1, 2024 and sell it today you would earn a total of  5.00  from holding Microsoft or generate 0.01% return on investment over 90 days.

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

Microsoft  vs.  Cheniere Energy

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

Cheniere Energy

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Cheniere Energy are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Cheniere Energy reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Cheniere Energy

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

The idea behind Microsoft and Cheniere Energy 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.