Correlation Between Microsoft and Hennessy Japan

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

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

Diversification Opportunities for Microsoft and Hennessy Japan

0.09

Correlation Coefficient

Microsoft  Hennessy Japan

Significant diversification

The 3 months correlation between Microsoft and Hennessy is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Hennessy Japan Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hennessy Japan 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 Hennessy Japan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hennessy Japan has no effect on the direction of Microsoft i.e., Microsoft and Hennessy Japan go up and down completely randomly.

Pair Corralation between Microsoft and Hennessy Japan

Given the investment horizon of 90 days Microsoft is expected to generate 1.22 times more return on investment than Hennessy Japan. However, Microsoft is 1.22 times more volatile than Hennessy Japan Fund. It trades about -0.01 of its potential returns per unit of risk. Hennessy Japan Fund is currently generating about -0.02 per unit of risk. If you would invest  41,466  in Microsoft on November 20, 2024 and sell it today you would lose (623.00) from holding Microsoft or give up 1.5% of portfolio value over 90 days.

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

Microsoft  vs.  Hennessy Japan Fund

Microsoft

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Hennessy Japan

Risk-Adjusted Performance

Very Weak

Over the last 90 days Hennessy Japan Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Hennessy Japan is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and Hennessy Japan

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

The idea behind Microsoft and Hennessy Japan Fund 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.