Correlation Between Microsoft and CarMax

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

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

Diversification Opportunities for Microsoft and CarMax

0.09

Correlation Coefficient

Microsoft  CarMax

Significant diversification

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

Pair Corralation between Microsoft and CarMax

Given the investment horizon of 90 days Microsoft is expected to under-perform the CarMax. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.14 times less risky than CarMax. The stock trades about -0.07 of its potential returns per unit of risk. The CarMax Inc is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  8,397  in CarMax Inc on November 29, 2024 and sell it today you would lose (151.00) from holding CarMax Inc or give up 1.8% of portfolio value over 90 days.

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

Microsoft  vs.  CarMax Inc

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 latest abnormal performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

CarMax Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days CarMax Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong primary indicators, CarMax is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and CarMax

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

The idea behind Microsoft and CarMax Inc 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 Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .