Correlation Between Microsoft and Critical Elements

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

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

Diversification Opportunities for Microsoft and Critical Elements

-0.67

Correlation Coefficient

Microsoft  Critical Elements

Excellent diversification

The 3 months correlation between Microsoft and Critical is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Critical Elements in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Critical Elements 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 Critical Elements. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Critical Elements has no effect on the direction of Microsoft i.e., Microsoft and Critical Elements go up and down completely randomly.

Pair Corralation between Microsoft and Critical Elements

Given the investment horizon of 90 days Microsoft is expected to under-perform the Critical Elements. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 3.81 times less risky than Critical Elements. The stock trades about -0.04 of its potential returns per unit of risk. The Critical Elements is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  41.00  in Critical Elements on November 27, 2024 and sell it today you would earn a total of  18.00  from holding Critical Elements or generate 43.9% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	96.67%
Values	Daily Returns

Microsoft  vs.  Critical Elements

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 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.

Critical Elements

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Critical Elements are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Critical Elements showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Critical Elements

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

The idea behind Microsoft and Critical Elements 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.

Check out your portfolio center.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.