Correlation Between Microsoft and FAT Brands

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

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

Diversification Opportunities for Microsoft and FAT Brands

0.5

Correlation Coefficient

Microsoft  FAT Brands

Very weak diversification

The 3 months correlation between Microsoft and FAT is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and FAT Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FAT Brands 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 FAT Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FAT Brands has no effect on the direction of Microsoft i.e., Microsoft and FAT Brands go up and down completely randomly.

Pair Corralation between Microsoft and FAT Brands

Given the investment horizon of 90 days Microsoft is expected to under-perform the FAT Brands. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.68 times less risky than FAT Brands. The stock trades about -0.05 of its potential returns per unit of risk. The FAT Brands is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  447.00  in FAT Brands on October 3, 2024 and sell it today you would earn a total of  85.00  from holding FAT Brands or generate 19.02% return on investment over 90 days.

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

Microsoft  vs.  FAT Brands

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.

FAT Brands

Risk-Adjusted Performance

13 of 100

Good

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

Pair Trading with Microsoft and FAT Brands

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

The idea behind Microsoft and FAT Brands 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.