Correlation Between Microsoft and New Economy

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

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

Diversification Opportunities for Microsoft and New Economy

0.17

Correlation Coefficient

Microsoft  New Economy

Average diversification

The 3 months correlation between Microsoft and New is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund 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 New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of Microsoft i.e., Microsoft and New Economy go up and down completely randomly.

Pair Corralation between Microsoft and New Economy

Given the investment horizon of 90 days Microsoft is expected to generate 1.36 times more return on investment than New Economy. However, Microsoft is 1.36 times more volatile than New Economy Fund. It trades about 0.09 of its potential returns per unit of risk. New Economy Fund is currently generating about 0.06 per unit of risk. If you would invest  23,571  in Microsoft on September 21, 2024 and sell it today you would earn a total of  20,132  from holding Microsoft or generate 85.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Microsoft  vs.  New Economy Fund

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

New Economy Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Economy Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Microsoft and New Economy

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

The idea behind Microsoft and New Economy Fund 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.