Correlation Between Microsoft and First Community

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

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

Diversification Opportunities for Microsoft and First Community

0.2

Correlation Coefficient

Microsoft  First Community

Modest diversification

The 3 months correlation between Microsoft and First is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and First Community Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Community Banc 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 First Community. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Community Banc has no effect on the direction of Microsoft i.e., Microsoft and First Community go up and down completely randomly.

Pair Corralation between Microsoft and First Community

Given the investment horizon of 90 days Microsoft is expected to under-perform the First Community. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.51 times less risky than First Community. The stock trades about -0.09 of its potential returns per unit of risk. The First Community Bancshares is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  4,164  in First Community Bancshares on October 20, 2024 and sell it today you would lose (45.00) from holding First Community Bancshares or give up 1.08% of portfolio value over 90 days.

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

Microsoft  vs.  First Community Bancshares

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.

First Community Banc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Community Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental drivers, First Community is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Microsoft and First Community

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

The idea behind Microsoft and First Community Bancshares 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.