Correlation Between Microsoft and Topco Technologies

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

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

Diversification Opportunities for Microsoft and Topco Technologies

-0.2

Correlation Coefficient

Microsoft  Topco Technologies

Good diversification

The 3 months correlation between Microsoft and Topco is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Topco Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Topco Technologies 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 Topco Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Topco Technologies has no effect on the direction of Microsoft i.e., Microsoft and Topco Technologies go up and down completely randomly.

Pair Corralation between Microsoft and Topco Technologies

Given the investment horizon of 90 days Microsoft is expected to generate 2.43 times more return on investment than Topco Technologies. However, Microsoft is 2.43 times more volatile than Topco Technologies. It trades about 0.04 of its potential returns per unit of risk. Topco Technologies is currently generating about -0.17 per unit of risk. If you would invest  41,794  in Microsoft on October 20, 2024 and sell it today you would earn a total of  1,109  from holding Microsoft or generate 2.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.88%
Values	Daily Returns

Microsoft  vs.  Topco Technologies

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 latest stock price uproar, may contribute to short-horizon losses for the private investors.

Topco Technologies

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Topco Technologies has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Topco Technologies 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 Topco Technologies

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

The idea behind Microsoft and Topco Technologies 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.