Correlation Between Microsoft and Bellway PLC

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

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

Diversification Opportunities for Microsoft and Bellway PLC

0.13

Correlation Coefficient

Microsoft  Bellway PLC

Average diversification

The 3 months correlation between Microsoft and Bellway is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Bellway PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bellway PLC 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 Bellway PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bellway PLC has no effect on the direction of Microsoft i.e., Microsoft and Bellway PLC go up and down completely randomly.

Pair Corralation between Microsoft and Bellway PLC

Given the investment horizon of 90 days Microsoft is expected to under-perform the Bellway PLC. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 80.73 times less risky than Bellway PLC. The stock trades about -0.11 of its potential returns per unit of risk. The Bellway PLC is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  238,800  in Bellway PLC on December 25, 2024 and sell it today you would earn a total of  2,400  from holding Bellway PLC or generate 1.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	96.72%
Values	Daily Returns

Microsoft  vs.  Bellway PLC

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.

Bellway PLC

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bellway PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Bellway PLC exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Bellway PLC

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

The idea behind Microsoft and Bellway PLC 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.