Correlation Between Microsoft and Merchants Bancorp

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

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

Diversification Opportunities for Microsoft and Merchants Bancorp

-0.37

Correlation Coefficient

Microsoft  Merchants Bancorp

Very good diversification

The 3 months correlation between Microsoft and Merchants is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp 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 Merchants Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merchants Bancorp has no effect on the direction of Microsoft i.e., Microsoft and Merchants Bancorp go up and down completely randomly.

Pair Corralation between Microsoft and Merchants Bancorp

Given the investment horizon of 90 days Microsoft is expected to under-perform the Merchants Bancorp. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.3 times less risky than Merchants Bancorp. The stock trades about -0.28 of its potential returns per unit of risk. The Merchants Bancorp is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  2,177  in Merchants Bancorp on October 14, 2024 and sell it today you would lose (2.00) from holding Merchants Bancorp or give up 0.09% of portfolio value over 90 days.

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

Microsoft  vs.  Merchants Bancorp

Microsoft

Risk-Adjusted Performance

0 of 100

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.

Merchants Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merchants Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Preferred Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Microsoft and Merchants Bancorp

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

The idea behind Microsoft and Merchants Bancorp 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.