Correlation Between Microsoft and Cerence

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

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

Diversification Opportunities for Microsoft and Cerence

0.06

Correlation Coefficient

Microsoft  Cerence

Significant diversification

The 3 months correlation between Microsoft and Cerence is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Cerence in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cerence 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 Cerence. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cerence has no effect on the direction of Microsoft i.e., Microsoft and Cerence go up and down completely randomly.

Pair Corralation between Microsoft and Cerence

Given the investment horizon of 90 days Microsoft is expected to under-perform the Cerence. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 31.46 times less risky than Cerence. The stock trades about -0.07 of its potential returns per unit of risk. The Cerence is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  782.00  in Cerence on October 22, 2024 and sell it today you would earn a total of  476.00  from holding Cerence or generate 60.87% return on investment over 90 days.

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

Microsoft  vs.  Cerence

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.

Cerence

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cerence are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Cerence exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Cerence

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

The idea behind Microsoft and Cerence 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.