Correlation Between Microsoft and Komatsu

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

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

Diversification Opportunities for Microsoft and Komatsu

-0.59

Correlation Coefficient

Microsoft  Komatsu

Excellent diversification

The 3 months correlation between Microsoft and Komatsu is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Komatsu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Komatsu 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 Komatsu. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Komatsu has no effect on the direction of Microsoft i.e., Microsoft and Komatsu go up and down completely randomly.

Pair Corralation between Microsoft and Komatsu

Given the investment horizon of 90 days Microsoft is expected to generate 1.28 times less return on investment than Komatsu. But when comparing it to its historical volatility, Microsoft is 1.72 times less risky than Komatsu. It trades about 0.06 of its potential returns per unit of risk. Komatsu is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  2,147  in Komatsu on December 5, 2024 and sell it today you would earn a total of  843.00  from holding Komatsu or generate 39.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	87.02%
Values	Daily Returns

Microsoft  vs.  Komatsu

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 abnormal performance in the last few months, the Stock's technical and fundamental indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Komatsu

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Komatsu are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Komatsu reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Komatsu

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

The idea behind Microsoft and Komatsu 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.