Correlation Between Microsoft and Gourmet Provisions

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

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

Diversification Opportunities for Microsoft and Gourmet Provisions

-0.25

Correlation Coefficient

Microsoft  Gourmet Provisions

Very good diversification

The 3 months correlation between Microsoft and Gourmet is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Gourmet Provisions Internation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gourmet Provisions 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 Gourmet Provisions. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gourmet Provisions has no effect on the direction of Microsoft i.e., Microsoft and Gourmet Provisions go up and down completely randomly.

Pair Corralation between Microsoft and Gourmet Provisions

Given the investment horizon of 90 days Microsoft is expected to generate 49.91 times less return on investment than Gourmet Provisions. But when comparing it to its historical volatility, Microsoft is 26.9 times less risky than Gourmet Provisions. It trades about 0.06 of its potential returns per unit of risk. Gourmet Provisions International is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  0.22  in Gourmet Provisions International on August 31, 2024 and sell it today you would lose (0.21) from holding Gourmet Provisions International or give up 95.45% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.73%
Values	Daily Returns

Microsoft  vs.  Gourmet Provisions Internation

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.

Gourmet Provisions

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Gourmet Provisions International are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent basic indicators, Gourmet Provisions reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Gourmet Provisions

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

The idea behind Microsoft and Gourmet Provisions International 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.