Correlation Between Microsoft and KLX Energy

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

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

Diversification Opportunities for Microsoft and KLX Energy

-0.14

Correlation Coefficient

Microsoft  KLX Energy

Good diversification

The 3 months correlation between Microsoft and KLX is -0.14. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and KLX Energy Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KLX Energy Services 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 KLX Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KLX Energy Services has no effect on the direction of Microsoft i.e., Microsoft and KLX Energy go up and down completely randomly.

Pair Corralation between Microsoft and KLX Energy

Given the investment horizon of 90 days Microsoft is expected to generate 0.32 times more return on investment than KLX Energy. However, Microsoft is 3.13 times less risky than KLX Energy. It trades about 0.1 of its potential returns per unit of risk. KLX Energy Services is currently generating about -0.04 per unit of risk. If you would invest  23,595  in Microsoft on September 20, 2024 and sell it today you would earn a total of  21,851  from holding Microsoft or generate 92.61% return on investment over 90 days.

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

Microsoft  vs.  KLX Energy Services

Microsoft

Risk-Adjusted Performance

5 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 5 (%) 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.

KLX Energy Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days KLX Energy Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Microsoft and KLX Energy

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

The idea behind Microsoft and KLX Energy Services 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.