Correlation Between Microsoft and Fancy Wood

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

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

Diversification Opportunities for Microsoft and Fancy Wood

0.34

Correlation Coefficient

Microsoft  Fancy Wood

Weak diversification

The 3 months correlation between Microsoft and Fancy is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Fancy Wood Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fancy Wood Industries 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 Fancy Wood. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fancy Wood Industries has no effect on the direction of Microsoft i.e., Microsoft and Fancy Wood go up and down completely randomly.

Pair Corralation between Microsoft and Fancy Wood

Given the investment horizon of 90 days Microsoft is expected to generate 221.43 times less return on investment than Fancy Wood. But when comparing it to its historical volatility, Microsoft is 97.63 times less risky than Fancy Wood. It trades about 0.05 of its potential returns per unit of risk. Fancy Wood Industries is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  36.00  in Fancy Wood Industries on September 1, 2024 and sell it today you would earn a total of  1.00  from holding Fancy Wood Industries or generate 2.78% return on investment over 90 days.

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

Microsoft  vs.  Fancy Wood Industries

Microsoft

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 3 (%) 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.

Fancy Wood Industries

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fancy Wood Industries are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental drivers, Fancy Wood sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Fancy Wood

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

The idea behind Microsoft and Fancy Wood Industries 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.

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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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.