Correlation Between Microsoft and YTL Hospitality

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

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

Diversification Opportunities for Microsoft and YTL Hospitality

0.25

Correlation Coefficient

Microsoft  YTL Hospitality

Modest diversification

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

Pair Corralation between Microsoft and YTL Hospitality

Given the investment horizon of 90 days Microsoft is expected to generate 1.37 times more return on investment than YTL Hospitality. However, Microsoft is 1.37 times more volatile than YTL Hospitality REIT. It trades about -0.07 of its potential returns per unit of risk. YTL Hospitality REIT is currently generating about -0.13 per unit of risk. If you would invest  42,261  in Microsoft on November 29, 2024 and sell it today you would lose (3,008) from holding Microsoft or give up 7.12% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.33%
Values	Daily Returns

Microsoft  vs.  YTL Hospitality REIT

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 abnormal performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

YTL Hospitality REIT

Risk-Adjusted Performance

Very Weak

Over the last 90 days YTL Hospitality REIT has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest conflicting performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with Microsoft and YTL Hospitality

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

The idea behind Microsoft and YTL Hospitality REIT 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.