Correlation Between Microsoft and SPDR Kensho

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

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

Diversification Opportunities for Microsoft and SPDR Kensho

0.25

Correlation Coefficient

Microsoft  SPDR Kensho

Modest diversification

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

Pair Corralation between Microsoft and SPDR Kensho

Given the investment horizon of 90 days Microsoft is expected to generate 1.13 times more return on investment than SPDR Kensho. However, Microsoft is 1.13 times more volatile than SPDR Kensho New. It trades about -0.06 of its potential returns per unit of risk. SPDR Kensho New is currently generating about -0.07 per unit of risk. If you would invest  42,261  in Microsoft on November 29, 2024 and sell it today you would lose (2,288) from holding Microsoft or give up 5.41% of portfolio value over 90 days.

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

Microsoft  vs.  SPDR Kensho New

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.

SPDR Kensho New

Risk-Adjusted Performance

Very Weak

Over the last 90 days SPDR Kensho New has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable primary indicators, SPDR Kensho is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Microsoft and SPDR Kensho

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

The idea behind Microsoft and SPDR Kensho New 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.