Correlation Between Microsoft and CMC Corp

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

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

Diversification Opportunities for Microsoft and CMC Corp

0.5

Correlation Coefficient

Microsoft  CMC Corp

Very weak diversification

The 3 months correlation between Microsoft and CMC is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and CMC Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CMC Corp 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 CMC Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CMC Corp has no effect on the direction of Microsoft i.e., Microsoft and CMC Corp go up and down completely randomly.

Pair Corralation between Microsoft and CMC Corp

Given the investment horizon of 90 days Microsoft is expected to generate 0.56 times more return on investment than CMC Corp. However, Microsoft is 1.8 times less risky than CMC Corp. It trades about 0.11 of its potential returns per unit of risk. CMC Corp is currently generating about 0.04 per unit of risk. If you would invest  21,872  in Microsoft on September 26, 2024 and sell it today you would earn a total of  22,061  from holding Microsoft or generate 100.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.19%
Values	Daily Returns

Microsoft  vs.  CMC Corp

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.

CMC Corp

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CMC Corp are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, CMC Corp may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and CMC Corp

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

The idea behind Microsoft and CMC Corp 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..