Correlation Between Microsoft and Federal Mogul

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

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

Diversification Opportunities for Microsoft and Federal Mogul

0.4

Correlation Coefficient

Microsoft  Federal Mogul

Very weak diversification

The 3 months correlation between Microsoft and Federal is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Federal Mogul Izmit in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Mogul Izmit 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 Federal Mogul. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Mogul Izmit has no effect on the direction of Microsoft i.e., Microsoft and Federal Mogul go up and down completely randomly.

Pair Corralation between Microsoft and Federal Mogul

Given the investment horizon of 90 days Microsoft is expected to generate 1.3 times less return on investment than Federal Mogul. But when comparing it to its historical volatility, Microsoft is 1.34 times less risky than Federal Mogul. It trades about 0.18 of its potential returns per unit of risk. Federal Mogul Izmit is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  30,550  in Federal Mogul Izmit on September 23, 2024 and sell it today you would earn a total of  1,950  from holding Federal Mogul Izmit or generate 6.38% return on investment over 90 days.

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

Microsoft  vs.  Federal Mogul Izmit

Microsoft

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 1 (%) 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.

Federal Mogul Izmit

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Federal Mogul Izmit has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong forward indicators, Federal Mogul is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Microsoft and Federal Mogul

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

The idea behind Microsoft and Federal Mogul Izmit 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.