Correlation Between Microsoft and GEM

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

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

Diversification Opportunities for Microsoft and GEM

-0.33

Correlation Coefficient

Microsoft  GEM

Very good diversification

The 3 months correlation between Microsoft and GEM is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and GEM Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GEM Co 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 GEM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GEM Co has no effect on the direction of Microsoft i.e., Microsoft and GEM go up and down completely randomly.

Pair Corralation between Microsoft and GEM

Given the investment horizon of 90 days Microsoft is expected to generate 0.68 times more return on investment than GEM. However, Microsoft is 1.46 times less risky than GEM. It trades about 0.1 of its potential returns per unit of risk. GEM Co is currently generating about 0.0 per unit of risk. If you would invest  22,345  in Microsoft on September 28, 2024 and sell it today you would earn a total of  21,466  from holding Microsoft or generate 96.07% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.57%
Values	Daily Returns

Microsoft  vs.  GEM Co

Microsoft

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

GEM Co

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days GEM Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, GEM is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and GEM

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

The idea behind Microsoft and GEM Co 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.