Correlation Between Microsoft and CBOE SP

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

By analyzing existing cross correlation between Microsoft and CBOE SP 500, you can compare the effects of market volatilities on Microsoft and CBOE SP 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 CBOE SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and CBOE SP.

Diversification Opportunities for Microsoft and CBOE SP

0.48

Correlation Coefficient

Microsoft  CBOE SP

Very weak diversification

The 3 months correlation between Microsoft and CBOE is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and CBOE SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CBOE SP 500 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 CBOE SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CBOE SP 500 has no effect on the direction of Microsoft i.e., Microsoft and CBOE SP go up and down completely randomly.

Pair Corralation between Microsoft and CBOE SP

Given the investment horizon of 90 days Microsoft is expected to generate 1.38 times less return on investment than CBOE SP. In addition to that, Microsoft is 2.47 times more volatile than CBOE SP 500. It trades about 0.07 of its total potential returns per unit of risk. CBOE SP 500 is currently generating about 0.23 per unit of volatility. If you would invest  441,156  in CBOE SP 500 on September 18, 2024 and sell it today you would earn a total of  33,827  from holding CBOE SP 500 or generate 7.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Microsoft  vs.  CBOE SP 500

Pair Trading with Microsoft and CBOE SP

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

The idea behind Microsoft and CBOE SP 500 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.