Correlation Between Microsoft and Source SP

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

By analyzing existing cross correlation between Microsoft and Source SP 500, you can compare the effects of market volatilities on Microsoft and Source SP 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 Source SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Source SP.

Diversification Opportunities for Microsoft and Source SP

0.63

Correlation Coefficient

Microsoft  Source SP

Poor diversification

The 3 months correlation between Microsoft and Source is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Source SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Source SP 500 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 Source SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Source SP 500 has no effect on the direction of Microsoft i.e., Microsoft and Source SP go up and down completely randomly.

Pair Corralation between Microsoft and Source SP

Given the investment horizon of 90 days Microsoft is expected to generate 1.73 times more return on investment than Source SP. However, Microsoft is 1.73 times more volatile than Source SP 500. It trades about 0.1 of its potential returns per unit of risk. Source SP 500 is currently generating about -0.03 per unit of risk. If you would invest  42,799  in Microsoft on September 27, 2024 and sell it today you would earn a total of  1,012  from holding Microsoft or generate 2.36% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Microsoft  vs.  Source SP 500

Microsoft

Risk-Adjusted Performance

2 of 100

Insignificant

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 current stock price uproar, may contribute to short-horizon losses for the private investors.

Source SP 500

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Source SP 500 are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Source SP is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Microsoft and Source SP

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

The idea behind Microsoft and Source SP 500 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..