Correlation Between Microsoft and Target

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

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

Diversification Opportunities for Microsoft and Target

0.84

Correlation Coefficient

Microsoft  Target

Very poor diversification

The 3 months correlation between Microsoft and Target is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Target in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target 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 Target. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target has no effect on the direction of Microsoft i.e., Microsoft and Target go up and down completely randomly.

Pair Corralation between Microsoft and Target

Given the investment horizon of 90 days Microsoft is expected to generate 0.77 times more return on investment than Target. However, Microsoft is 1.3 times less risky than Target. It trades about -0.08 of its potential returns per unit of risk. Target is currently generating about -0.19 per unit of risk. If you would invest  42,398  in Microsoft on December 29, 2024 and sell it today you would lose (3,340) from holding Microsoft or give up 7.88% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	96.83%
Values	Daily Returns

Microsoft  vs.  Target

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 latest abnormal performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Target

Risk-Adjusted Performance

Very Weak

Over the last 90 days Target has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Microsoft and Target

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

The idea behind Microsoft and Target 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.