Correlation Between Microsoft and Diamond Offshore

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

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

Diversification Opportunities for Microsoft and Diamond Offshore

0.12

Correlation Coefficient

Microsoft  Diamond Offshore

Average diversification

The 3 months correlation between Microsoft and Diamond is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Diamond Offshore Drilling in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamond Offshore Drilling 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 Diamond Offshore. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamond Offshore Drilling has no effect on the direction of Microsoft i.e., Microsoft and Diamond Offshore go up and down completely randomly.

Pair Corralation between Microsoft and Diamond Offshore

Given the investment horizon of 90 days Microsoft is expected to generate 0.24 times more return on investment than Diamond Offshore. However, Microsoft is 4.14 times less risky than Diamond Offshore. It trades about 0.09 of its potential returns per unit of risk. Diamond Offshore Drilling is currently generating about -0.03 per unit of risk. If you would invest  23,879  in Microsoft on October 21, 2024 and sell it today you would earn a total of  19,024  from holding Microsoft or generate 79.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	81.25%
Values	Daily Returns

Microsoft  vs.  Diamond Offshore Drilling

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.

Diamond Offshore Drilling

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diamond Offshore Drilling has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Diamond Offshore is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and Diamond Offshore

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

The idea behind Microsoft and Diamond Offshore Drilling 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.