Correlation Between Microsoft and National Aerospace

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

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

Diversification Opportunities for Microsoft and National Aerospace

0.26

Correlation Coefficient

Microsoft  National Aerospace

Modest diversification

The 3 months correlation between Microsoft and National is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and National Aerospace Fasteners in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Aerospace 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 National Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Aerospace has no effect on the direction of Microsoft i.e., Microsoft and National Aerospace go up and down completely randomly.

Pair Corralation between Microsoft and National Aerospace

Given the investment horizon of 90 days Microsoft is expected to generate 0.87 times more return on investment than National Aerospace. However, Microsoft is 1.15 times less risky than National Aerospace. It trades about 0.18 of its potential returns per unit of risk. National Aerospace Fasteners is currently generating about 0.03 per unit of risk. If you would invest  41,700  in Microsoft on September 23, 2024 and sell it today you would earn a total of  1,960  from holding Microsoft or generate 4.7% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Microsoft  vs.  National Aerospace Fasteners

Microsoft

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 1 (%) 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.

National Aerospace

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days National Aerospace Fasteners has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, National Aerospace is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Microsoft and National Aerospace

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

The idea behind Microsoft and National Aerospace Fasteners 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.